Kiatnakin Bank

Asset quality stabilizing, but loan recovery slow BUY

Kiatnakin Bank Plc (KKP)

Asset quality stabilizing. Since 3Q14 asset quality has shown signs of stabilizing after

the 92% jump in NPLs over the past six quarters to peak at Bt10.8bn (5.6% of total

loans) in 2Q14 from Bt5.6bn (3.5% of total loans) in 4Q12. The QoQ increase in NPLs

from auto loans slowed sharply in 3Q14 (2% or Bt83mn in 3Q14 vs. 14% or Bt437mn in

2Q14 and 10% or Bt263mn in 1Q14). Although total loss on repossessed cars still rose in

3Q14 on more repossessed cars sold, management says the loss on repossessed cars

per unit started declining in 3Q14. We conservatively forecast a small decline in loss on

repossessed cars to Bt600mn in 4Q14F from Bt618mn in 3Q14 and then to Bt1.5bn in

2015F from Bt2.1bn in 2014F. We note that repayment of real estate loans pulled NPLs

down by 3% QoQ in 3Q14.

Rebuilding general LLR. Despite the shrinkage in NPLs, KKP upped provisions by 74%

QoQ in 3Q14, adding Bt350mn in general provisions to the Bt220mn regular provisions

in 3Q14 in an effort to rebuild general loan loss reserve (LLR) back to Bt950mn after a

depletion in 2Q14. LLR coverage inched up to 71% from 69% at 2Q14. The bank aims to

build more general LLR in 4Q14 and on this basis we forecast an 8% QoQ rise in

provisions in 4Q14 with a rise in credit cost to 1.29% from 1.21% in 3Q14, bringing 2014F

credit cost to 1.2%. On the back of easing delinquencies, we expect a decline in credit

cost to 1.1% in 2015F from 1.2% in 2014F.

Cut 2014 loan growth forecast to zero from 5% to fine tune with the -1.5% in 9M14

and halve 2015 to 5% from 10% to factor in the bank’s bearish view on 2015 auto loan

growth (low single digit growth at best). It expects the country’s high household debt

and high repayments of loans extended in 2012 and 2013 to keep loan growth low. In

4Q14, it expects to get new L-T corporate loans worth Bt6bn, achieving its targeted

Bt10bn outstanding corporate loans at YE2014. Recall that KKP only just expanded into

the large corporate segment in March this year. In 2015, KKP plans to add SME loans.

Rising CASA mix. KKP has successfully raised its mix of current and savings (CASA)

deposit accounts to 33% of total interest-bearing liabilities at 3Q14 from 12% at 4Q13.

This is the main reason for a 15 bps QoQ fall in cost of funds in 3Q14. More proactive

liquidity management and rising CASA mix is expected to sustain NIM as long as

interest rates stay put. However, we expect NIM to fall 8 bps in 2015F as we assume a

50 bps hike in the policy rate in 2H15.

Cut TP. We cut target price to Bt45 (1x mid-2015F BVPS) from Bt50 after reducing

earnings forecast by 2% for 2014F and 13% for 2015F, mainly on lower loan growth

expectations and higher expected loss on sale of repossessed cars, to bring this in line

with 3Q14 results.

Maintain Buy; the worst is priced in. We maintain our L-T buy on KKP as it is

moving into recovery and asset quality deterioration has begun to simmer down after

used car prices began to stabilize early this year.