Kiatnakin Bank

Kiatnakin Bank Plc (KKP)

 

 - 3Q15 profit better than expected. Asset quality improves  

KKP announced 3Q15 net profit at B923m or a continued growth for the third consecutive quarter at 23.2%qoq and 24.6%yoy, which was 25% better than expected. Debt provision expenses increased significantly due to a B600m increase of general reserve in this quarter to prepare for future economic fluctuation (general reserves at end-3Q15 rose to B2.45bn), while NPL coverage ratio (LLR/NPL) rose to 80.2%. NPL (consolidated financial statement) decreased from 6.90% of total loans at end-2Q15 to 6.60% at end-3Q15 due to car leasing and property transactions, while NPL from SME transactions still increased. Other main businesses could show good growth, for both loans (growing corporate loans) and NIM (decreasing funding cost). 

- Maintain forecast. Key mission is increasing coverage ratio  

We maintain our earnings forecast in 2015-2016. We project KKP’s net profit to grow only 6.7%yoy in 2015, while 4Q15 earnings are projected to weaken as NIM would decrease, debt provision expense would stay high, and operating expense would increase continuously. However, the profit would rebound 17.1%yoy in 2016 mainly because debt provision expense would start to decrease. The core businesses still lack supporting factor; car leasing transactions have started to show a good sign but a significant rebound is still unlikely in 2016. Yet, there is a positive factor from increasing NIM. Non-interest income from the capital market business, which used to be a strong point of KKP, would still be sluggish; a recovery can be hoped for in 2016. Moreover, increasing debt provision expense from general reserve to increase the coverage ratio to above 120% like peers would negate a benefit from a recovery of the banking and capital market businesses. 

- Limited downside. Upgrade to HOLD for dividend 

We upgrade our recommendation from SELL to HOLD for a dividend yield of over 5.5% p.a. (paying semiannually). In the short term, the share price already has a limited downside and is still undervalued. 2016 fair value is B36 (GGM, based on PBV of 0.83x and long-term ROE of 10%).