Kiatnakin Bank

Kiatnakin Bank Plc (KK)

Investment thesis
We expect KK to post strong earnings growth of 39% YoY to Bt4.7bn for FY13 and another 19% YoY to Bt5.6bn for FY14, driven by synergies tied to the KK-PHATRA merger. Its 1H13 earnings jumped 72% YoY to Bt2.4bn. Furthermore, there could be scope for FY13 earnings upside if the bank holding company were to deliver loan growth in excess of our assumption of 19% and/or fee income growth of more than 60%. Note that for 1H13 KK posted YoY growth of 18% for loans and 210% for fee income. The stock trades at a low YE13 PBV of 1.2x (against a sector mean of 1.7x) and should pay a dividend yield of 5%. We maintain our TRADING BUY rating.
Reiterate FY13 loan growth target of 19%
Management confirmed its 19% loan growth target for FY13 after delivering 18% YoY loan growth for 1H13, led by HP and SME business. HP currently comprises 74% of KK’s total portfolio; management anticipates 15% expansion in this category in FY13, while its SME loans (25% of total loans) are targeted to jump 34%. The bank guides for a loan spread of 3.7% for FY13, down slightly from 3.9% in FY12. Note that its 1H13 NIM was 3.99%, somewhat fatter than our FY13 NIM assumption of 3.64%. 
Loan loss provisioning should decline in 2H13
KK said that its current loan loss coverage ratio is 111%, which is above its comfort zone of 100%. LLPs should decline HoH in 2H13 following the setting of an extra provision against counter-cyclical risk in 1H13. We project FY13 LLPs of Bt2.2bn, up 41% YoY. KK targets an NPLs/loans ratio range of 3.0-3.5%; it was 3.5% at end-June 2013.
Fee-based income has major scope for growth 
PHATRA’s securities, prop-trading and fund management operations drove fee income growth of 195% YoY for 1H13 to Bt2.7bn. The number was boosted by the recognition of advisory and underwriting fees for the IPO of BTS’s infrastructure fund. We maintain our FY13 fee income growth assumption at 60%, as we don’t expect IB fees to be as good in 2H13 as they were in 1H13. That said, there are still five months left in the year; any new IB deals in addition to the current 2H13 pipeline would mean upside to fee income and earnings.
Continued growth for 2H13 
Management guides that 2H13 earnings will be close to the number for 1H13, due to lower HoH LLPs, ongoing loan growth, led by SME and P-loans (collateralized by cars) and gains on the investment and proprietary trading portfolios.  There is some risk to the earnings profile—about 40% of KK’s HP portfolio is used cars, the market for which has slumped as a result of the first-time car buyer scheme (the prices of used cars below 1,500ccs have dived by about 30% in the last year). But there is also considerable scope for upside from IB business.