Kiatnakin Bank

Investment thesis

We have cut our KKP earnings projections by 3% to Bt3.1bn for FY14 and by 8% to Bt3.5bn for FY15. Our downgrades were prompted by a diminished expectation for HP business in 2H14 and rising retail NPLs, especially on HP for used cars. Due to the lower earnings projections, our YE15 target price declines 5.3% to Bt45, pegged to an unchanged YE15 PBV of 1.0x. Nevertheless, KKP promises acceptable dividend yields of 4.3% for FY14 and 4.9% for FY15, so our HOLD rating stands.

KKP cuts FY14 loan growth target to flat or a small contraction

Management has cut its FY14 loan growth target from 2-3% to flat or a small decline (much lower than its FY13 lending growth performance of 12.9%)—commercial growth of 0-5% (-0.8% in 9M14) and retail growth of 0% or a small contraction (-4.6% in 9M14). KKP anticipates an FY14 loan spread of 3.6-3.8%, down from 4.0% last year.

We believe the FY14 loan growth guidance is more realistic, given the weak economic environment. We have cut our loan growth assumptions from 5% to 0% for FY14 and from 15% to 10% for FY15. Yet, our NIM forecasts stand at 3.5% for FY14 and 3.6% for FY15.

Loan loss provisions to fall in 4Q14 and FY15

KKP told the analyst meeting that its earlier FY14 loan loss provisioning guidance range of Bt1.6-2.0bn was too low (9M14 LLPs totaled Bt1.7bn, excluding impairments on HP for used cars totaling Bt1.1bn). Management said that the bank holding company booked extra impairments for used car HP of Bt398m in 3Q14 and will probably book impairments in 4Q14. Note that 46% of its HP portfolio comprised used cars at end-September. We currently assume LLPs of Bt2.5bn and a loss of Bt950m on sales of foreclosed assets in FY14.

The bank holding company targets an NPLs/loans ratio range of 5-6% this year—it was high a 5.6% at end-September, up from 3.8% at YE13. If the economy remains weak through 4Q14, KKP may set heavier LLPs than we currently assume in order to build its loan loss reserve.

FY14 NPA sales target maintained, but lower YoY gains expected

Management maintains NPA sales guidance of about Bt2.3bn (9M14 NPA sales were Bt1.3bn; FY13 NPA sales were Bt2.8bn). Note that KKP booked gains of Bt390m from NPA sales in 9M14 and gains of Bt1bn last year. We assume NPA sales of Bt2.1bn in FY14 and a gain of Bt400m. The assets in question—which mostly comprise real estate—would probably fetch higher prices in a year or so than KKP could expect in the current unfavorable environment.