Krung Thai Bank
Workding to make it through the year BUY
Krung Thai Bank Plc (KTB)
2016 earnings are expected to continue mediocre with hefty provisions and downward pressure on NIM from lending rate cuts. We do believe this will be its worst year – and that share price has already discounted this year’s mediocre performance. We keep KTB as a Buy with unchanged target price of Bt20 (1x 2016F BVPS).
Worst NPL inflow in 1Q16. The QoQ rise in NPLs in 1Q16 was worse than expected at 18% (Bt14bn), comprised largely of relapsed restructured corporate and SME (mostly large SME) loans from a wide range of sectors. The bank expects this to continue over the rest of the year, but at a slower pace than 1Q16, on easing NPL inflow. As a result of a hike in normalized provisions to Bt1bn/month from Bt700mn/month and a sharp rise in NPLs, credit cost continued hefty at 1.73% vs. 1.75% for 4Q15. LLR coverage decreased to 103.4% from 112.5% at 4Q15, but is still within its policy range of LLR coverage above 100%. With asset quality deterioration lingering into 2016, we maintain our forecast of continued hefty provisions with a 1.5% credit cost, on par with last year even though it will not have the large extra provisions for SSI loans this year.
Loan growth is not a focus for this year. YTD loan contraction mainly came from government loans. KTB will not focus on loan growth this year and keeps its 2016 loan growth target at 3-4% (vs. SCBS’ forecast of 4%) vs. 3.8% in 2015. Most of the growth this year will come from SME loans as it plans to shift into lower gear for housing loans to control asset quality. KTB is in the best position to benefit from accelerating public investment, which should provide upside to its loan growth target.
Further fall in cost of funds to mitigate lending interest rate cuts. Cost of funds fell a material 20 bps QoQ to 1.86% in 1Q16, better than we anticipated. The bank expects a further reduction in cost of funds in 2016 but at slower rate than 1Q16. This will mitigate the impact of a cut in lending interest rates done to support its clients and the economy. We are reviewing our NIM forecast for the banking sector in order to factor in the impact of lending rate cuts. We preliminarily estimate downside risk of 5-9 bps to our forecast of a stable 2016F NIM, eroding 2016F forecasts by 4-8%.
Tightening opex. Its cost to income ratio came down substantially to 41.3% in 1Q16 from 44.6% in 4Q15 and 50.3% in 1Q15, the lowest since 4Q13. The lower cost to income ratio in 1Q16 reflected its cost control policy and a cut in performance bonus. This will help mitigate the impact from high provisions.
Maintain Buy. Its valuation is undemanding at 8.3x PER and 0.92x PBV in 2016F vs. 12% ROE, already discounted to asset quality concerns. We expect the deterioration in asset quality to be worst this year (1H16) and look for a strong earnings recovery next year.
KTB is in the best position to benefit from accelerating public investment.
