Krung Thai Bank

Krung Thai Bank Plc (KTB)

Top pick with a TP hike. KTB joins KBANK on our list of top buys for three reasons.
1) Its recapitalization gives it the ability to get in on any expansion opportunity that
presents itself and also build up LLR coverage to cushion against any downturn. 2) Its
asset quality risk is eased by SSI’s capital raising. 3) It is the best play on the theme of
accelerating public investment in 2H12. We raised target price to Bt21 (1.55x average
BVPS for 2012F and 2013F, based on 15.8% L-T ROE, 11.98% cost of equity and 5%
sustainable growth) as we re-rated PBV target to 1.55x from 1.4x to reflect higher
growth prospects and lower risk accommodated by a stronger capital base.
Capital overhang removed. KTB is in the process of raising Bt35.2bn by issuing
2,796,312,250 shares via a rights issue of 4 old shares for 1 new share at Bt12.6/share.
The subscription date is on October 4-11, 2012. This will remove the capital overhang
and allow it to build up LLR coverage as a cushion against any downturn, which will
remove the LLR overhang. The capital raising will boost its capital adequacy ratio to
~15% (10% for tier 1) from ~13% (8% for tier 1).
SSI’s capital raising eases asset quality risk. SSI, to which it has provided a large
loan, is raising capital by Bt13.22bn, which is being supported by its new partner,
Vanomet, and its major shareholders. The capital raising will bring SSI’s D/E down to
1.6x from 3.1x, which will ease asset quality risk for its creditors, which include KTB. Of
SSI’s three main creditors (SCB, KTB, TISCO), KTB is the only bank that may not have
sufficient excess LLR (Bt2.9bn) to absorb the provisions needed if the SSI loans –
estimated at Bt20bn (1.3% of total loans) - become NPLs. This means the eased risk on
the loans to SSI benefits KTB the most. We have factored in extra provisions of Bt6bn
in 2H12 and Bt4bn 2013 (on top of normalized provisions of Bt6bn per year) to build
LLR coverage to 80% for YE2012 and 90% for YE2013 from 70% at 2Q12. SSI will start
making bullet payments to these three banks in 2Q13.
Best public investment play. As a government-owned bank, KTB is at the top of the
list to finance the government’s projects, which we expect to accelerate in 2H12 and
2013. The BoT forecasts public investment growth at 10.5% for 2012 and 22% for 2013.
Due to a delay in public investment toward 2013, we changed loan growth forecast to
12% from 15% for 2012F and 14% from 10% for 2013F. Its August loan growth continued
good at 0.7% MoM, brining 8M12 YTD loan growth to 7.1%.
New CEO. Mr. Vorapak Tanyawong appears to the strongest candidate to replace Mr.
Apisak Tantivorawong as the President of KTB in November 2012. We view the
replacement of Mr. Apisak, hailed as a successful president, with Mr. Vorapak as a
positive, considering his high profile. He has over 20 years of extensive experience in the
banking business. He currently serves as Chairman and Chief Executive Officer of
Finansa Securities Ltd. and served as Senior Executive Vice President and Group Head,
Corporate Banking Group 1 at SCB over 2009-2010, Senior Country Officer and Country
Head of Investment Banking for JPMorgan Chase Thailand over 2004-2009, Managing
Director and Co-Head of Global Markets at Deutsche Bank over 2001-2004, and Bank of
America, where he started as a Credit Analyst and progressed to Country Manager.