Kasiskorn

Kasiskorn

Investment thesis
We expect KBANK to deliver strong earnings growth of 21% in FY13 to Bt42.7bn and another 14% in FY14 to Bt48.7bn. The drivers will be accelerated lending in 2H13 (mostly SME and corporate), a sustained NIM and well-managed OPEX. The bank’s loan loss provisions will normalize in 2Q13 onward after KBANK set heavy counter-cyclical risk provisions in 1Q13. Its stock price has fallen 16% since May 22, 2013 to Bt191 after foreigners started selling Thai shares and bonds. Given 31% upside to our YE13 target price of Bt251, we see an opportunity for bottom-fishing on KBANK. Our BUY rating stands. 
Lighter 2Q13 LLPs and an extra gain of Bt1.1bn on NPL sales
KBANK said 2Q13 loan loss provisions will be about Bt2bn, down from Bt3.5bn the previous quarter. Note that 1Q13 LLPs were heavier than the normal range of Bt2bn-2.3bn/quarter, due to the setting of an extra provision against counter-cyclical risk. KBANK expects provisions to normalize at a level equal to 70-80 bps of loans. Hence, we maintain our FY13-14 LLP assumptions at Bt9.9bn and Bt10bn, respectively. Note also that KBANK aims to book a Bt1.1bn gain from selling toxic assets to the Thai Asset Management Corporation (TAMC) since 2001. 
Loan growth target range of 9-11% 
Management expressed concern over the Thai economy. However, KBANK believes that its FY13 loan growth target of 9-11% is conservative. Its focus is high-yield SME lending. Thus, its NIM will fatten from 3.4% in FY12 to 3.4-3.6%, said management. KBANK expects the policy interest rate to stay at 2.5% till YE13. The loan portfolio should post growth of 2% QoQ at end-June. During 5M13, corporate lending grew 7% YTD, followed by retail at 2.5% and SME at 1.7%. We model for FY13 loan growth of 10% and a NIM of 3.41% for FY13.
Extra expenses of Bt1.6bn for K-Transformation impairment
KBANK plans to book a one-time expense of Bt1.6bn in 2Q13 for impairments to some areas of its core banking system (K-Transformation). That could push up the 2Q13 cost/income ratio to 44-45% from 40% in 1Q13. Nevertheless, management guides for an FY13 cost/income ratio of 45-46%, down from 46.5% in FY12. The bank also says that 2Q13 fee income rose by more than 15% YoY. Both SME and retail fees grew in excess of 20% YTD during 5M13, said management.
Record earnings for 2Q13 and a new record likely for 3Q13
We estimate a 2Q13 profit of 11bn, up by 9% QoQ and 17% YoY, led by 2% QoQ loan growth, a NIM sustained at 3.4% and strong fee income expansion of 19% YoY. We view that the extra expenses for K-Transformation should be more-or-less offset by the gain from NPL sales to TAMC. Seasonality should make for stronger HoH lending in 2H13, so 3Q13 earnings are likely to be even higher.