Kasikornbank

Kasikornbank Plc (KBANK)

 

- Harsh effect on 2Q15 profit. Provision increased as reinforcement  

We estimate 2Q15 net profit at B10.6bn, shrinking 14.0%qoq and 9.1%yoy as a result of increasing operating expense, mostly related to installation of a core banking system regarding deposits; since it is the final phase of K-transformation project, cost to income ratio is projected to increase to 47.6% in this quarter. Debt provision expense would also increase, with credit cost projected at 120bp; a further increase is anticipated in every quarter of the year to the bank’s credit cost target of 150bp by the end of 2015 in an attempt to cope with NPLs that might increase to 2.7-2.8% of total loans from 2.47% at the end of 1Q15 (consolidated financial statement). Moreover, NIM is projected to decrease around 10bp; despite a benefit from decreasing funding cost after the interest rate cut, NIM has been affected by decreasing average loan yields as a result of weak loan growth, lower interest rate, and debt restructuring to help vulnerable debtors, especially SME. Fee income would also decline following decreasing loan transactions, particularly from SMEs. 

- Revise 2015 profit forecast to year-on-year contraction 

We revise down FY2015-2016 earnings forecast by 16.3% and 10.3% to reflect increasing debt provision expense and credit cost. NIM forecast is also decreased from KBANK’s more relax debt repayment policies for SME debtors. According to the new forecast, 2015 net profit is projected to shrink 9.2%yoy, compared with a flat growth projected for the sector. However, KBANK’s net profit is estimated to grow as much as 17.1%yoy in 2016 as a result of the low base in 2015 and decreasing debt provision expense. 

- Stay away from KBANK in short term  

After the forecast revision, new 2015 fair value (GGM, based on 1.92x PBV and long-term ROE forecast of 17.5%) is B232 (B270 previously). We reiterate BUY for the share price still has more than 18% upside. However, since the earnings forecast is slashed more than 10% and 2015 earnings are projected to shrink from last year, which would affect the share price in the short term, we recommend staying away from KBANK for now.