Krung Thai Bank

Krung Thai Bank Plc (KTB)
 

Investment thesis: We have cut our KTB rating from BUY to HOLD because of the following risks: 1) a capital increase next year, 2) potentially higher QoQ loan loss provisioning in 2Q12 and 3) NIM squeeze, due to the BOT’s new 0.47% levy on deposits, B/Es and short-term debentures. We believe that the risk of a capital increase and soft 2Q12 earnings will pressure KTB’s share price performance during the next three months. Within Bank space, we prefer BBL and SCB.
FY12 loan growth target range of 5-7%: Despite strong 1Q12 lending growth of 4.5% QoQ, management maintains its FY12 loan growth target range at 5-7%. The drivers are corporate and SOE business (such as mass transit projects and international lending). Note that last year the bank delivered 14% lending expansion, far in excess of its official target range of 6-7%.
NIM slippage: Because—in contrast to the other banks—KTB didn’t set provisions for the BOT’s 0.47% levy on bank funding, it will have to start doing so in 2Q12, which will squeeze its NIM. Management expects 2Q12 NIM to decline 20 bps QoQ to 2.6%. The bank guides for an FY12 NIM in the range of 2.6-2.7%.
FY12 LLPs: Although KTB plans to cut loan loss provisioning (LLPs) back to a normal level of Bt1.5bn/quarter (Bt6bn/year), having set Bt13.5bn in 4Q11 (due to the flooding), management does not rule out the possibility of them being heavier. The bank’s loan loss cushion ratio declined to 68% at end-March 2011 from 71% at YE11, due to a flooding-related rise in doubtful debts. As such, we forecast that KTB will set LLPs of Bt10bn for FY12 in order to bring up its YE12 loan loss coverage ratio to a level closer to the sector mean of 108%.
Capital base adequate for this year? Given a modest lending growth target range of 5-7%, management believes the capital adequacy ratio (CAR) of 13.1% will be adequate for expansion without need for cash call this year. However, we anticipate stronger loan growth of 10% (or more) for both FY12 and FY13, given the scale of current and planned government stimulus spending.
Outlook
FY12 loan growth target range of 5-7%: Despite strong 1Q12 lending growth of 4.5% QoQ and 14.5% YoY, management maintains an FY12 loan growth target range at 5-7%. The drivers are corporate and SOE business (such as mass transit projects and international lending). Note that last year KTB delivered 14% lending expansion, far in excess of its official target range of 6-7%. The bank guides that there could be big-ticket loan repayments in 2H12, as was the case last year. We forecast that KTB will deliver FY12 loan growth of 10%. 
NIM slippage: Because—in contrast to the other banks—KTB didn’t set provisions for the BOT’s 0.47% levy on bank funding, it will have to start doing so in 2Q12, which will squeeze its NIM. Management expects 2Q12 NIM to decline 20 bps QoQ to 2.6%. The bank guides for an FY12 NIM in the range of 2.6-2.7%. Note that KTB’s 1Q12 NIM was 2.8%. We maintain our FY12 NIM assumption at 2.6%. Moreover, increased competition for deposit mobilization among commercial banks and special financial institutions (SFI) could push up deposit rates, which would make for further NIM squeeze.