Kasikornbank

Kasikornbank Plc (KBANK)  

 

- 2Q15 profit beats projection despite higher-than-expected debt provision  

 

KBANK posted 2Q15 net profit at B11.4bn, beating the projection by 8%; the net profit decreased only 7.4%qoq and 2.2%yoy because fee income and revenues from the life insurance business were better than expected. Operating expenses also increased at a slower rate than projected, especially premise and equipment expense. However, debt provision expense also increased, with a new 2015 credit cost target of 150bp in an attempt to cope with NPLs that might increase to 2.7-2.8% of total loans at the end of the year from 2.39% in 2Q15 (consolidated financial statement) and significantly rising SMLs. Moreover, NIM dropped around 8bp; 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. 

 

- 2H15 earnings in downtrend  

 

We maintain FY2015-2016 earnings forecast. 2015 net profit is projected to shrink 9.2%yoy due to significantly increasing debt provision expense from risk of increasing NPLs and SMLs, while 2016 net profit is projected to grow 17.1%yoy from the low base in 2015 and easing debt provision. For 2H15, the bank’s earnings would remain in a downtrend for debt provision and operating expenses would grow at an accelerated rate. Yet, despite its worsening asset quality, KBANK still has an advantage from its earlier high debt provision, with NPL vs SML coverage ratio of 75.0% at the end of 2Q15, which is possibly higher than the sector’s average that should already decline from 50%. 

 

- Most factors already reflected in share price  

 

We recommend buying KBANK. 2015 fair value is B232 (GGM, based on 1.92x PBV and long-term ROE forecast of 17.5%). The share price has undergone substantially correction until PBV is only 1.6x, close to the average PBV in the past ten years, thus a limited downside.