Kiatnakin Bank

Kiatnakin Bank Plc (KK)

Investment thesis
We have raised our KK earnings projection by 7% to Bt4.7bn for FY13 (but our FY14 number is unchanged). Our upgrade was prompted by stronger 1Q13 fee income than modeled, driven by brokerage commissions and investment gains from its (formerly PHATRA’s) proprietary trading and investment portfolio. As such, our FY13 fee income assumption jumps 24% to Bt4bn. Due to the higher earnings projection, our YE13 target price increases 11% to Bt76.50, pegged to a YE13 PBV of 1.85x. Given 12% upside to our new target price, we maintain our TRADING BUY rating on KK.
Fee income assumption upgraded
The KK-PHATRA merger meant that KK’s 1Q13 fee income shot up by 181% YoY and 42% QoQ to Bt1.3bn, somewhat more than we had assumed. The growth was driven by brokerage fees, FX trading, bancassurance sales and prop trading. As such, we have upped our FY13 fee income assumption by 24% to Bt4bn. Our heftier number includes the big-ticket fees from being sole financial advisor & lead underwriter for the BTS Mass Transit Growth Infrastructure Fund (BTSGIF) in 2Q13. Management expects revenue of Bt500-700m from the deal.
FY13 lending growth target of 19%
KK guides for FY13 lending growth of 19%, which we believe is achievable, given strong demand for HP for cars and finance for small business development (chiefly car sales premises), particularly in the provinces. Note that the bank holding company posted 1Q13 loan growth of 4.1% QoQ and 24% YoY. HP currently comprises 75% of the total portfolio, followed by SME/small business development at 24%. Management anticipates 15% retail lending growth in FY13, while it targets 34% SME business expansion. The bank guides for a loan spread of 3.7%, down from 3.9% in FY12. We conservatively assume an FY13 NIM of 3.65%.
Q2 2013 LLP-setting should decline from 1Q13
KK said that its current loan loss coverage ratio is 114% (including counter-cyclical provisions of Bt165m in 1Q13), which is above its comfort zone of 100%. Thus, its loan loss provisions (LLPs) should decline in 2Q13 onward. Note that KK set LLPs of Bt596m in 1Q13, up 132% YoY. We project FY13 provisions of Bt1.8bn, up 16% YoY. KK targets a NPLs/loans ratio range of 3.0-3.5%; it was 3.3% at YE12.