Kiatnakin Bank

Kiatnakin Bank Plc (KK)

Q4 2011 result was 7% below consensus: KK reported a Q4 2011 profit of Bt681m, down 22% QoQ but up 39% YoY. The result missed our estimate by 24% and the street by 7%, attributable to NIM squeeze and heavy loan loss provisioning of Bt466m (we modeled for only Bt300m in Q4 2011 LLPs). Note that KK’s 4Q11 pre-provision operating profit rose 107% YoY but fell 44% YoY, due to a slimmer NIM. FY11 profit was flat YoY at Bt2.9bn, which represents 95% of our FY11 projection.
Results highlights: Lending grew by 4.8% QoQ and 27% YoY to Bt152.4bn (driven by the HP and SME categories)—higher than our estimate of 24%. KK’s NIM fell by 53 bps QoQ and 75 bps YoY to 3.48% in Q4 2011, due mainly to a sharp rise in funding costs and the rescheduling of interest payments for clients that were flood victims. The bank set heavy loan loss provisions of Bt466m for Q4 2011, up by 25% QoQ and 55%, far above our assumption of Bt300m. Its NPLs/loans ratio remained low at 3.5% at YE11 (down from 3.7% at end-September 2011) with a substantial loan loss coverage ratio of 108.4%. 
Outlook: KK faces significantly higher funding costs with the BOT’s planned 0.35% fee on outstanding bank-issued Bills of Exchange (and the likelihood of further fees) to service the FIDF debt. We, thus, have revised down our FY12-13 NIM assumptions from 4.4% and 4.3%, respectively, to 3.4% and 3.3% to factor in rising financial costs and intensifying competition for business. Nevertheless, we have revised down our FY12-13 LLP forecasts to Bt800m and Bt900m, respectively, from Bt1bn for both years, which recognizes lower NPLs and a bigger loan loss cushion at YE 2011.
What’s changed? We have cut our FY 2012-13 earnings projections by 11% and 5%, respectively, to Bt3bn and Bt3.4bn to account for diminished expectations for NIM.
Recommendation: Our lower FY 2012 profit forecast meant that we pared back our YE 2012 target price by 16% to Bt36, based on a justified PBV at 0.9x (close to KK’s long-term mean). Our TRADING BUY rating stands, premised on the stock’s generous dividend of 8.3% for both FY 2012 and FY 2013. There would also be scope for earnings upside if the planned KK-PHATRA merger were to go ahead.