Krung Thai Bank

Krung Thai Bank Plc (KTB)

Sharp slowdown in 2014 loan growth. KTB targets loan growth of 5-7% in 2014, around half the 12% in 2013, with an increased focus on SME and retail loans. We keep our 2014F loan growth at 7%. As a result of the reorganization by the new CEO, KTB has gained market share in private sector loans. Despite high repayments from the government sector, KTB’s 2013 loan growth of 12% beat the sector’s 11%. The proportion of government loans decreased from 18% at YE2011 to 11% at YE2012 and 8% at YE2013. KTB says the caretaker government cannot borrow more, but can only roll over existing loans. This could lead to a further decrease in the proportion of government loans this year.
Downside risk to NIM. We see downside risk to our forecast of a 6 bps squeeze in NIM for 2014F for two reasons. Firstly, KTB targets deposit expansion of 8-10% in 2014, a higher rate than the 5-7% loan growth as a way to hang on to liquidity and keep its loan to deposit ratio in the range of 90-92%. This will put downward pressure on net interest margin (NIM). Secondly, there may be a further cut in the policy rate to cope with the economic slowdown as a result of the political unrest and this we have not yet put into our forecasts.
Sustainable fee income growth. KTB targets sustainable net fee income growth of 15% in 2014, in line with our forecast. It plans to bundle bancassurance and mutual fund products for its retail clients. It also expects higher fee income from corporate clients as the new management has brought with it the ability to add more services. 
LLR coverage buildup to continue. Its strong pre-provision profit has allowed the bank to build up loan loss reserve (LLR) coverage to 112% at YE2013 from 93% at YE2012 and it plans to bulk this up further in 2014 by adding more extra provisions to normalized provisions of Bt1.5bn/quarter. In addition, the bank aims to bring NPLs down further in 2014. It has no worries over asset quality on corporate loans, but does expect NPL formation in retail loans, mainly mortgage loans. We forecast 2014F provisions at 0.72% of total loans, the same level of credit cost as 2013.
Maintain top Buy. KTB remains a top pick with an unchanged target price of Bt24 (1.5x 2014F BVPS) on: 1) the lowest valuation in terms of PBV/ROE (1.07x PBV relative to 15% ROE for 2014F) of large banks; 2) rising market share of loans and fee income on a more proactive strategy and better service after the new CEO reorganized the bank;
3) benefit from higher public investment in the long run.