Krung Thai Bank

Krung Thai Bank Plc (KTB)

Investment thesis: We maintain our BUY rating on KTB, premised on: 1) its role implementing government policy objectives, 2) a steep decline in loan loss provisioning, 3) a CAR of 13.7%, sufficient to sustain FY12 lending growth without need for capital-raising, and 4) efficiency enhancements.
Modest FY12 loan growth target range of 5-7%: Management believes that its FY12 loan growth target is achievable, driven by corporate and state-agency/SOE business (particularly related to public infrastructure projects). Note that KTB delivered 14% lending expansion last year—much better than its official target range of 6-7%. As such, we forecast FY12 loan growth of 10%.
FY12 NIM slippage: A falling policy interest rate and more emphasis on SME and retail lending will enable KTB to sustain FY12 NIM at close to the level it posted for FY11, according to management. We, however, forecast that its NIM will slip to 2.6% from 2.8% last year, due to increased competition for deposits (especially from SFIs) and the BOT’s planned levies on bank deposits and bank-issued Bills of Exchange.
LLP-setting to normalize: KTB plans to cut loan loss provisioning back to a normal amount of Bt1.5bn/quarter (Bt6bn/year) after setting provisions of Bt13.5bn in FY11 in order to build its loan loss cushion (and extra provisions were set for 4Q11 against the risk of a surge in NPLs in the wake of the flooding). Note that the bank’s loan loss cushion ratio expanded to 71% at YE11 from 57% at YE10. Management does not plan to increase the loan loss reserve to the sector average (102%)—a substantial proportion of KTB’s lending is to state agencies and SOEs, which are explicitly or implicitly guaranteed by the central government.  
Efficiency enhancements: Lending expansion to corporate and retail clients, rising fee income and well-managed OPEX will bring down the FY12 cost/income ratio to below last year’s number of 47%, according to management. KTB targets net fee income growth of 15%, up from 9% last year, while OPEX will decline YoY (OPEX spiked as a result of the 4Q11 flooding). However, we expect the cost/income ratio to rise to 50%, due to NIM squeeze and the BOT’s planned levies on deposits and B/Es. 
Outlook
Modest FY12 loan growth target range of 5-7%: Management believes that its FY12 loan growth target is achievable, driven by corporate and state-agency/SOE business (particularly related to public infrastructure projects). Note that KTB delivered 14% lending expansion last year against a target range of only 6-7%. As such, we forecast that it will post loan growth of 10% for FY12. Our projection doesn’t include the govt’s rice-pledging scheme, which will require a fund size of Bt400bn. The Bank for Agriculture and Agricultural Co-operatives (BAAC) will manage funding sources (half of which is expected to come from issuing bonds and BAAC borrowing). KTB will lend funds to BAAC, guaranteed by the MOF. Thus, credit risk is negligible. Loan draw-down started in late December 2011.
FY12 NIM slippage: A falling policy interest rate and more emphasis on SME and retail lending will enable KTB to sustain FY12 NIM at close to the level it posted for FY11, according to management. We, however, forecast that its NIM will slip to 2.6% from 2.8% last year, due to increased competition for deposits (especially from SFIs) and the BOT’s planned levies on bank deposits and bank-issued Bills of Exchange (in order to service FIDF debt).
Loan loss provisioning to fall: Despite the US economic slowdown and EU sovereign debt crisis, KTB plans to maintain its loan loss provisioning at Bt6bn for FY11, or Bt1.5bn per quarter, down sharply from a total Bt13.5bn in LLPs last year. Management guided that the bank has only negligible exposure to either the EU or the US. It expects the NPLs/loans ratio to drop below 4% by YE12, kept in check by accelerated troubled debt restructuring and improved risk management. KTB’s loan loss cushion was 71% at YE12 (up from 57% at YE10), a level that management is comfortable with—a substantial proportion of KTB’s lending is to state agencies and SOEs, which are explicitly or implicitly guaranteed by the central government.
Note that we currently model for FY12 LLPs of Bt10bn, substantially higher than KTB guidance. There would be significant upside to our bottom-line forecast if the bank were to set loan loss provisions as it has guided.