Kiatnakin Bank

Kiatnakin Bank Plc (KK)

Business plan after M&A. March to fully generate profit from strong points of both companies

KK and PHATRA’s management revealed the business vision after an official
M&A process on 12 September 2012, raising strong points of the 2 companies
as a smooth contradiction although there are several obstacles from the main
business to depress profitability of the bank in the long run, such as a relatively
low asset size of KK which resulted in no economy of scale, incomprehensive
service provision due to small number of branches, and financial cost which is
still 100-150bop higher than the sector’s average. Consequently, for strategy in
the next 3 years, the bank would focus on running businesses of its expertise
(no growth target for each business has been revealed so far) as well as
creating value added for existing businesses. 1) Commercial banking group –
The bank would still focus on high yield loan, including used car hire-purchase
(55% of total loan) and SME (22% of total loan, focusing on mid- and smallsize
loan including property and apartment development (KK’s market share of
this group of loan is very large), floor plan, and logistics. For special asset
management (SAM) business, asset under management (B5.4bn at present
with appraised value of B10.9bn) and profit from NPA sale are projected to
decrease continuously. 2) Private client group – With asset under PHATRA’s
management of more than B170bn combined with KK’s potential customer
base of more than B60bn, total asset of the bank would increase to B230bn.
The strategy that will create value added to the business is introducing high
margin products to high net worth customers (>B30m each) such as structured
products, offshore services, or credit enhancement products which used to
have a limitation about capital from operation under securities company but is
now able to operate more under the bank which has stronger capital adequacy
ratio. 3) Investment banking group – the bank will be able to create value
added to the business immediately with PHATRA’s advantage of the largest
market share in the capital market (equity offering and M&A) as well as
expertise in generating profit from investment business with diversified
strategies such as arbitrage trading strategy and systematic trading strategy.
At the same time, the bank will be able to expand to universal investment
advisory and loan issuance business.

Goodwill elimination plan will be concluded in Q4 2012
Accumulated profit still sufficient to pay dividend
The bank has planned to eliminate goodwill impairment of B4.7bn from M&A
with PHATRA from the financial statement in order to get rid of the problem
of impairment testing every year as well as to reflect the real ROE and ROA
(which will not include goodwill in the equity and asset calculation). Likewise,
tier 1 capital (14.72% with 9M12’s profit included) according to Basel III will
not include goodwill in the calculation as well. Now the bank is consulting
with related regulators and auditors and the clear outcome is projected in
4Q12. If the elimination could be done, it will have an effect on the net loss
in the quarter that there is the elimination (no impact on cash flow as it is
non-cash item), which will make BVS of the bank decrease by B5.67/share
but ROE and ROA increase to 12% and 1.5% for FY2012’s forecast. In terms
of dividend, the bank confirmed that it would be able to pay dividend from
accumulated profit of B12.5bn.

Reiterate BUY. Attractive from PBV, PER, and div yield in 2013
We reiterate our Buy recommendation for KK in the long run as there is 21%
upside of the current share price from the fair value. Moreover, the share
price has substantially declined as a result of the pressure from goodwill
impairment elimination plan.