Kiatnakin Bank

Kiatnakin Bank Plc (KK)

Earnings exceeded estimate by 20%
KK posted a 3Q12 profit of Bt928m, up by 8% YoY and 13% QoQ. The result was 20% higher than our estimate and 13% above the consensus, attributable to greater foreclosed asset sales than expected (we assumed sales of 250m; KK posted foreclosed asset sales of Bt386m). 9M12 earnings inched up 4% YoY to Bt2.3bn, which represents 77% of our FY12 forecast.

Results highlights
Lending grew by 4.2% QoQ and 18.1% YTD to Bt181.7bn (driven by HP, personal loans and SME business); our estimate was 4%. Additionally, KK’s NIM dipped 52 bps QoQ to 3.01% in 3Q12, as it didn’t make a net extra gain on troubled debt restructuring; in 2Q12 it did post a net gain.
The bank set loan loss provisions of Bt427m for the quarter, up 15% YoY but down 24% QoQ. Its NPLs/loans ratio inched up to 3.6% at end-September from 3.4% at end-June. KK’s loan loss coverage ratio dipped to 103.2% from 106.9% at end-June. 
Outlook
KK normally posts its best loan growth of the year in the fourth-quarter, due to seasonality for HP lending and SME business. Thus, our FY12 loan growth projection of 25% looks achievable. However, the completion of KK-PHATRA merger could bring extra expenses to KK’s bottom-line, as it booked PHATRA goodwill of Bt5bn on its balance sheet at end-September. Such goodwill is normally amortized within 5-10 years. We didn’t factor this expense into our model. Management might amortize the goodwill over the longest possible period in order to flatter its earnings profile.
What’s changed?
We maintain our FY12 earnings projection of Bt3bn unchanged for the moment, as KK’s 9M12 profit comprises 77% of our full-year number. We expect the bank holding company to start amortizing PHATRA’s Bt5bn in goodwill next year.  
Recommendation
Although the KK-PHATRA merger could yield synergistic benefits next year, the amortization of PHATRA’s goodwill will have to be amortized. If Phatra Capital were to swing one or more big underwriting deals, the income would more than cover the cost of goodwill amortization for the year. As such, we maintain our FY13 earnings forecast at Bt3.65bn till the bank holding company unveils its goodwill amortization policy next year. Currently, the stock trades at an undemanding YE13 PBV of 1.1x, far below the sectoral mean of 1.6x. We, therefore, maintain our TRADING BUY rating with a target price of 54, pegged to PBV of 1.36x.