Krungthai Card
Another disappointing result SELL (maintained) Target Price: Bt14.70 Price (11/05/12): Bt17.80
Krungthai Card Plc (KTC)
Below our estimate & consensus: KTC missed all projections to post a 1Q12 loss of Bt155m (the previous quarter it reported a massive loss of Bt1.8bn). The result was far weaker than our estimate of a Bt20m loss and the consensus projection of a Bt38m loss, due mainly to heavy net loan loss provisions of Bt1.1bn (our assumption was Bt980m).
Results highlights: The net loan portfolio contracted by 3% QoQ and 4% YoY. KTC’s interest spread rose by 58 bps QoQ and 58 bps YoY to 19.89% in 1Q12, as the firm resumed accruing interest income from clients affected by the 4Q11 flooding (note that the BOT allowed all financial institutions to relax their clients’ term payments to 90 days, due to the flooding in 4Q11).
The firm set net loan loss provisions of Bt1.1bn for the quarter, up 22% YoY but down 49% QoQ. Its loan loss provisioning remained high YoY (despite the lending contraction) in anticipation of debt restructuring for clients affected by the flooding. Note that KTC’s NPLs/loans ratio declined to 3.6% at end-March from 5.2% at YE11.
Outlook: We are negatively biased with regard to the firm’s prospects for 2Q12—its net loan loss provisioning looks likely to remain high as a result of accelerated debt restructuring. We do not expect lending growth in 2Q12 because of intensifying competition for business from big banks (with cheaper funding costs) and the firm’s high D/E ratio of 9.5x at end-March (up from 8.8x at YE11). The high D/E ratio raises the specter of KTC having to raise capital—its creditor covenant ceiling is 10.0x.
What’s changed? We now expect heavy loan loss provisioning in 2Q12. KTC has an analyst meeting scheduled for next week. We will probably adjust our model after we have heard what management has to say about the outlook.
Recommendation: Our SELL rating stands because of: 1) the possibility of a capital increase, 2) the risk of earnings downside as a result of heavy loan loss provisioning and 3) NIM squeeze brought about by increased competition from big banks.
