KASIKORNBANK

Kasiskornbank Plc (KBANK)

Investment thesis: We have revised up our KBANK FY12-13 profit forecasts up 4% and 3%, respectively, to Bt34.2bn and Bt43.9bn in anticipation that the bank ‘s cost/income ratios for the two years will be lower than we earlier assumed. Because of our earnings projection upgrades, we have raised our YE13 target price by 2% to Bt251, pegged to a justified PBV of 2.4x. Our BUY rating stands.
Stronger QoQ lending growth in 3Q12: Management told us that 3Q12 loans will post further QoQ growth, led by the retail and corporate categories. Besides, its BOT soft funding (for SME clients) is likely to augment its SME portfolio in 3Q12 onward. KBANK guides that FY12 loan growth will achieve its target range of 9-11% (we model for loan growth of 12%). We estimate 3Q12 lending expansion at 3.5% QoQ and 7.4% YTD.
Cost/income ratio assumptions cut:  KBANK’s 1H12 cost/income ratio dropped to 44.8%, down substantially from the 48.0% it posted for 1H11 and somewhat lower than our previous assumption, which was based on bank guidance of 47.5% for FY12. The cost/income ratio now looks set to undershoot that guidance, so we have cut our FY12-FY13 cost/income ratio assumptions to 46.2% and 43.7%, respectively, from 48.1% and 45.1% previously. Hence, we have revised up our FY12-13 earnings forecasts by 4% and 3%, respectively, to Bt34.2bn and Bt43.9bn. 
Expect 3Q12 LLPs to rise to Bt2bn: Given the global economic slowdown, KBANK aims to set bigger loan loss provisions of Bt2bn for 3Q12 (against normalized LLPs of Bt1.7bn-1.9bn/quarter, equal to 0.6% of total loans). We assume FY12 loan loss provisions of Bt7.6bn for FY12, up 3.5% YoY. 
Anticipate good YoY earnings growth for 3Q12: KBANK has sustained lending growth momentum and its fee income continues to rise. As such, we expect a good 3Q12 profit of Bt8.6bn, up 11% YoY (but down 8% QoQ due to bigger OPEX, partly related to the ongoing booking of K-transformation costs).

Outlook
Expect good 3Q12 earnings: We forecast 3Q12 earnings of Bt8.6bn, up 11% YoY (but down 8% QoQ due to rising OPEX spending and some K-transformation costs). The expected bottom-line expansion was led by loan growth of 3.5% QoQ (driven by the retail and corporate categories), fee income and a slightly fatter NIM of 3.4%. Our 3Q12 estimate represents 25% of our new FY12 profit forecast of Bt34.2bn, which we have just raised by 4% because we cut our cost/income ratio assumption.
Better loan growth in 3Q12 onward: The bank guides that the corporate and retail portfolios led QoQ growth for 3Q12. Note that its 8M12 lending growth was 9.1% YTD for retail and 4.9% YTD for corporate (KBANK targets FY12 growth of 12-15% for retail and 8-10% for corporate). In contrast, the SME portfolio posted 8M12 growth of merely 3.8% YTD against an FY12 target range of 10-12%. We expect that the bank to report 3Q12 loan growth of 3.5% QoQ and 7.4% YTD, augmented by the BOT’s soft funding program, but led by retail (chiefly HP and mortgages). Note that KBANK’s FY12 loan growth target range is 9-11% (we model for 12%).
Cost/income ratio assumptions cut: KBANK’s 1H12 cost/income ratio dropped to 44.8%, down substantially from the 48.0% it posted for 1H11 and somewhat lower than our previous assumption, which was based on bank guidance of 47.5% for FY12. The cost/income ratio now looks set to undershoot that guidance, so we have cut our FY12-FY13 cost/income ratio assumptions to 46.2% and 43.7%, respectively, from 48.1% and 45.1% previously. Hence, we have revised up our FY12-13 earnings forecasts by 4% and 3%, respectively, to Bt34.2bn and Bt43.9bn.

Good asset quality management and big loan loss reserve: Given the global economic slowdown, KBANK aims to set bigger loan loss provisions of Bt2bn for 3Q12 (against normalized LLPs of Bt1.7bn-1.9bn/quarter, equal to 0.6% of total loans). We assume FY12 loan loss provisions of Bt7.6bn for FY12, up 3.5% YoY. At end-June, KBANK’s NPLs/loans ratio was 2.2% with a big loan loss coverage ratio of 145%. The bank is comfortable with its current NPLs/loans ratio. We aren’t worried about its asset quality at the moment. We expect an NPLs/loans ratio of 2.4% at YE12.
3Q12 NIM to improve QoQ: Because of stronger loan growth of 3.5% QoQ and good funding mix management, KBANK anticipates that its 3Q12 NIM will inch up QoQ. We assume a 3Q12 NIM of 3.42%, basically flat QoQ (3.40% in 2Q12). Note that management guides that FY12 NIM will be sustained in the 3.4-3.5% range on accelerating loan growth in 2H12 and good funding management. The current & saving account (CASA) proportion of the funding mix was 64% at end-August 2012, higher than the sectoral mean of 57%. We believe that KBANK should be able to manage funding costs better than most other banks—only 2.7% of its funds come from Bills of Exchange.

Recommendation and valuation
BUY (maintained): Because we have cut our KBANK FY12 and FY13 cost/income ratio forecasts in anticipation of further efficiency improvements, we have revised up our FY12-FY13 earnings projections by 4% and 3%, respectively, to Bt34.2bn and Bt43.9bn. KBANK should prove broadly resilient to any external or domestic economic weakness, in part because the bank probably has the best risk management in the sector (its NPLs/loans ratio was only 2.20% at end-June 2012, down from 2.45% at YE11, while it has a big loan loss coverage ratio of 145%). Our earnings forecast upgrades prompted us to raise our YE13 target price by 2% to Bt251, pegged to a PBV of 2.4x (2.0SDs above its FY01-10 mean). Our BUY rating stands.