Krung Thai Bank

Krung Thai Bank Plc (KTB) 

 

Investment thesis

We attended KTB’s meeting yesterday with CFO Kittiya Todhanakasem and the IR team. Management set a conservative lending growth target of 3-4% with an unchanged NPL ratio in FY16 at 3.1% from last year. Besides that, KTB aims to bring its loan-loss-coverage ratio to 125% at YE16 from 110% at YE15. We view that most of the bank’s financial guidance remains on par with ours. We forecast that its FY16 earnings are in recovery mode with growth of 16% YoY, driven by lower loan-loss provisioning (LLP) setting and a well-managed cost/income ratio. Given the cheap valuation (YE16 PBV of 0.8x, against its mean of 1.2x) and attractive dividend yield of 5.1% in FY16, our BUY rating stands.

Prudent financial target for FY16 … mostly on par with our model

KTB management targets FY16 loan growth of only 3-4%, driven by medium SME and retail sectors (which yield higher lending rates than corporate). Its loan/deposit ratio is set at 92-95%. It also sets fee income growth of 10% from last year. Note that the bank excludes government loans for FY16. We view that KTB’s loan target is slightly lower than our model. We expect its loans to grow 5% in both FY16 and FY17, with sustainable consolidated NIM of 2.9% for both years. We forecast its fee income to grow 9% in FY16 on par with management’s calculations.

Better asset quality trend in FY16 … room to cut LLP from last year

Although KTB gave us no clues as to its LLP guidance for FY16, management expects it to have room to cut LLP somewhat due to its improved asset quality. New NPL formation was on a declining trend against last year, management said. Thus, its LLP setting could see a moderate drop, we calculate. Note that the CFO expected to build up the bank’s loan-loss-coverage ratio to 125% at YE16 from 110% at YE15. We forecast that its FY16 LLP will be down 33% YoY to Bt21bn to comply with the bank’s guidance. Management targets its NPL ratio to stay at 3.1% at YE16, close to last year’s figure.

KTB’s long-term mission is to catch up with peers in FY16-FY18

The team anticipated that it would bring its ROE of at least 12% in FY16 (we expect its FY16 ROE to be 12.8%) and enhance its profitability, market share and capability to come closer to its peers during FY17-FY18. This could stem from better cost efficiency management and greater utilization of its branch networks. Note that the CFO targets KTB’s FY16 cost/Income ratio of slightly lower than the 44.2% as recorded last year. However, we conservatively expect its high FY16 cost/income ratio of 48.7% in FY16 due to the faster rise in OPEX than fee income growth. However, we have seen scope for upside if KTB delivers a lower FY16 cost/income ratio than our model. We also forecast that its FY16 OPEX will rise 14% from greater expenses on new investment to make changes in its core banking system during FY16-FY18. Note that KTB plans to be the best digital bank in FY19.