Kiatnakin Bank

Kiatnakin Bank Plc (KK)

Buy —Supported by: 1) cheap valuation at 0.7x 2010 PBV, 2) good dividend
yield of 8% for 2010, and 3) potential rise in loan growth and gain on sale of
foreclosed properties upon economic recovery. We keep TP at Bt32.6 (0.85x
mid‐2011 BVPS, based on 8.8% L‐T ROE, 10.3% cost of equity, and 0% growth).

Achievable real estate loan growth — KK guided to good inflow of new real
estate loan approvals in 1Q10 to the point where it believes its full‐year target
of 10‐15% growth in real estate loans is achievable and leaves it unchanged,
despite a 10% QoQ contraction in 1Q10, which arose out of high loan
repayments by property developers after buyers hurried to transfer titles to get
in on the tax package, part of which expired in March. The extension of some
parts to May could bring another round of high loan repayments in 2Q10.

Upside risk on hire‐purchase (HP) loan growth —Strong domestic car sales
brought 5% HP loan growth in 1Q10, already achieving the low end of its 2010
target of 5‐10% HP growth and on track to beat target, ushering in upside risk
for loan growth. We maintain our 2010F total loan growth target at 10%, vs.
KK’s own target of 8‐12%.

New acquisition of high‐yield distressed asset management funds — KK
purchased Bt4.2bn worth of distressed assets from the GE group, growing
distressed assets by 20% QoQ in 1Q10. It expects these to generate 12‐15%
return (in line with its target ROE) over the next 5‐6 years, lower than the 15‐
25% yield it enjoyed for this type of asset over the past 10 years. These assets
are financial claims with defunct financial institutions sold at a deep discount
at the Financial Restructuring Authority’s auction in 1999. Despite this refill,
we expect steadily lower income from distressed assets over the next 5 years.

Accelerating sales of foreclosed properties — KK intends to accelerate sales of
foreclosed properties to Bt4bn this year from ~Bt3bn last year, as the economic
recovery provides a more amenable climate for realizing gain on sale of these.
As of 1Q10, appraisal value of foreclosed assets was Bt13.9bn, but book value
is Bt8.2bn, translating to potential unrealized investment gain of Bt5.7bn. 1Q10
gain on sale of foreclosed properties was Bt302mn, 38% of our 2010 forecast.

Unsustainable NIM — We do not expect NIM to be sustainable over the long
run even after this purchase, as KK will steadily resolve these high‐yield
distressed assets until they are gone. The long duration of its liabilities of 0.9
years means it will be to some extent affected by the expected rise in interest
rates in 2H10. We expect NIM to narrow by 24 bps in 2010 and 21 bps in 2011.