Kasikornbank

Kasikornbank Plc (KBANK)

 

Investment thesis

We attended KBANK’s analyst meeting yesterday. Mr. Predee Daochai, the president offered prudent FY16 financial guidance, saying he anticipates slow economic recovery and rising risk aversion on asset quality. This triggers us to raise our credit cost from 150bps in FY15 and 110bps in FY16 to about 170bps, both to comply with the bank’s guidance. As such, we cut our profit forecasts by 5% in FY15 to Bt40.5bn and by 11% in FY16 to Bt46bn from rising credit costs. Our BUY rating stands, premised on: 1) fast earnings recovery once economic recovery gets back on track next year and the cheap valuation of a low YE16 PBV of 1.2x (VS its L/T mean of 1.55x).

KBANK sets FY16 loan growth target of 6-7%, led by SME and retail

Management forecasts 2016 GDP growth of 3.2% following the anticipated 2.8% in 2015. The better FY16 GDP growth outlook prompted KBANK to set its FY16 loan growth target guidance at 6-7% (from expected 6% this year). The president guides for FY16 loan growth as follows—4-6% for corporate, 5-7% for SME and 5-7% for retail. We expect that loans tied to corporate and SME businesses in the electronics, food, energy, export-oriented and retail industries will dominate portfolio growth in 4Q15 onward. Our model assumes loan growth of 6% in FY15 and 7% in FY16.

FY16 financial guidance looks conservative

KBANK guides for non-interest income growth in the low teens this year and up to 10% in FY16 (close to our model). Its NIM targets are 3.5-3.7% for FY15 and 3.4-3.6% for next year (we assume NIMs of 3.5% in FY15 and 3.6% in FY16) and a cost/income ratio of 45-47% in both FY15 and FY16 (we assume 47% in both FY15 and FY16). The NPL/loan ratio should go to about 2.8% at YE15 and 3.5-3.6% at YE16. KBANK will raise its loan-loss provisioning at a credit cost of 170 bps in FY15 and FY16 to reflect slower economic recovery. We, thus, raise our credit cost to 166bps in FY15 from 150bps and 163bps in FY16 from the former 110bps. This triggers us to cut our earnings forecast 5% to Bt40.5bn in FY15 and 11% to Bt46bn in FY16. 

Scope for upside to our FY16 model

We believe that KBANK could deliver better loan growth and a fatter NIM than modeled if the economy were to recover faster in 2H16 than is currently forecast. Thus, its fee income could rise at a level exceeding 10% in FY16 because of KBANK’s expertise at retail and SME business. We forecast that its fee income will rise 13% in FY15 and 11% in FY16. Moreover, its “K-transformation” program will end next year, which will make for a significantly reduced cost/income ratio in FY17 onward (possible further upside for KBANK’s FY17 earnings outlook). Its end-Sept CAR was a hefty 17.1% (13.8% Tier-1)—we are unable to see any danger of a cash call being necessary in the foreseeable future.