Kiatnakin Bank

Kiatnakin Bank Plc 

 

Investment thesis

We have raised our earnings projections in FY16 by 4.4% to Bt3.8bn and in FY17 by 3.5% to Bt4.4bn. Both earnings upgrades are derived from raising our NIM forecasts 10bps to 4.1% in FY16 and 10bps to 4.0% in FY17. We again see that scope for upside for KKP could come from lighter loan-loss provisioning (LLP), better IB deals and lower than modeled losses on the sale of repossessed cars. We trust that corporate and HP loan growth could be the main core earnings drivers in FY16. Presently, KKP shares trade at a cheap YE16 PBV of 1.0x with dividend yields of 6.9%, the highest in the sector. We, thus, have upgraded our KKP rating from HOLD to BUY with a new trading price of 51, pegged to a justified PBV of 1.1x (close to the sector’s PBV).

Keep 5% FY16 loan growth forecast vs. 15-19% from KKP’s target

We have reiterated our FY16 loan growth on forecast of 5% against the firm’s ambitious loan growth target of 15-19% after the contraction last year—3.6%. KKP anticipates this year a full-year loan spread of 4.5-4.7%, up from 4.5% last year. We have increased our NIM forecasts 10bps to 4.1% in FY16 and 10bps in FY17 to 4.0%, both of which would still be far below KKP’s target of 4.5-4.7% because raising the focus on corporate lending could drag down its NIM as most corporate loans typically come with slimmer lending rates than those attached to retail loans. The heightened NIM triggers us to raise our earnings forecast 4.4% in FY16 to Bt3.8n and 3.5% in FY17 to Bt4.5bn.

Full-year LLP has space to fall YoY

KKP set FY15 LLP of Bt3.2bn, including impairments on HP for used cars totaling Bt2bn—at YE15, 46% of its HP portfolio comprised used cars. We currently assume a FY16 LLP of Bt3bn in our model (half of which is impairment on HP for used cars). KKP sets an NPL/loan ratio of below 5% at YE16, down from 5.8% at YE15. We view that KKP looks likely to set lighter LLP than we currently assume if the economy strengthens significantly during 2H16.

Scope for upside from IB deal and NPA sales

We believe that improved capital markets could enable KKP to build more revenue from an IB deal and asset management than FY15. We forecast KKP to deliver revenue of Bt500m from both divisions close to last year. Besides that, management said that FY16 sales of non-performing assets (NPA) should come to Bt1.6bn, with an anticipated gain of about Bt800m, which would equal last year’s. KKP recorded gains of Bt844m from NPA sales in FY15. We assume NPA sales of Bt1.6bn in FY16 with smaller gain of only Bt450m. If KKP were to sell NPA for bigger gains than modeled, there would be scope for upside to our FY16 earnings forecast. At YE15, it reported NPA totaling Bt4.6bn (with appraised value of about Bt9bn), which it intends to sell up all for a couple of years.