Kasikornbank

Investment thesis

We maintain our profit forecasts for KBANK at Bt43.9bn for FY14 and Bt50.9bn for FY15. The new government and an economic recovery in 2H14 will enable KBANK to deliver solid performances for 2H14 and beyond. We maintain our BUY rating, premised on: 1) earnings resilience in the face of an unfavorable business environment, 2) efficient management of asset quality (reflected in its low NPLs/loans ratio of 2.1% and high loan loss coverage of 141%) and 3) a declining cost/income ratio trend, as core banking upgrading costs (the K-Transformation program) will end in mid FY15. 

KBANK’s FY14 loan growth guidance unchanged

Management’s FY14 loan growth guidance remains a range of 7-8%. We expect KBANK to deliver 8%. The bank expects 9M14 loan growth of 5% YTD, driven by SME and corporate business. Note that YTD 8M14 loan growth was 2.5% for the corporate portfolio, 6.5% for SME and 2.2% for retail. We expect lending to the power generation (particularly VSPP), electronics, food and commodity industries to drive growth in 2H14. KBANK has the best SME risk management in the sector, so it is better at identifying good lending risks than its peers and can lend more confidently when the business climate is unfavorable than any other bank. Note that we expect loan growth of 9% for FY15.

FY14 financial guidance looks realistic

Management guides for non-interest income growth of 12-14% (close to our model), NIM of 3.4-3.6% (we expect an FY14 NIM of 3.35%) and a cost/income ratio of 45% (we assume 43%). The NPLs/loans ratio should not exceed 2.2% at YE14. KBANK will set loan loss provisions pegged to credit costs of 90 bps in 2H14 and 85 bps in FY14.

Fee income growth target range of 12-14% for 3Q14 and FY14

KBANK anticipates that a focus shift to retail and SME business in 2H14 will enable it to boost fee income. Management expects 3Q14 fee growth of 12-14% in line with its FY14 guidance. Transaction fees, bancassurance, loan-related fees and credit cards are the drivers, according to the bank. We conservatively forecast that its fee income will grow by 10% in FY14 and 11% in FY15, slightly below the bank’s numbers.

Record 3Q14 earnings expected, despite heavy LLPs

We estimate an earnings record for 3Q14 of 11.8bn, up 10% YoY and 1% QoQ, even though we also expect loan loss provisioning to increase by 7% QoQ and 9% YoY. Our model assumes a cost/income ratio of 46% (up from 44.6% in 2Q14 and 44% in 3Q13). We expect a 3Q14 pre-provision operating profit (PPOP) of Bt18.7bn, up 9% YoY but flat QoQ.