Krung Thai Bank

Investment thesis

We attended KTB’s pre-results analyst meeting on Friday. Management guides for slower HoH lending growth in 2H14, as the economy hasn’t recovered nearly as quickly as expected. Our FY14 loan growth assumption is 7% led by corporate and state agency business. We maintain our earnings forecasts at Bt32.8bn for FY14 and Bt35bn for FY15. Given the better FY15 economic outlook, there may be scope for upside to our FY15 earnings projection if KTB were to deliver loan growth exceeding 7% next year (possibly driven by businesses tied to state infrastructure projects and loans for M&A deals). Our BUY rating stands.

Slower lending growth in 2H14 but good outlook for next year

KTB’s 8M14 lending growth was 4.9% YTD, which was close to management’s FY14 lending growth guidance of 5-7%. Note that we assume loan growth of 7% in both FY14 and FY15 in our model. Given that the bank has achieved the swiftest 8M14 loan growth in the sector, we see scope for upside to 2H14 lending growth, assuming that the government’s  forthcoming stimulus package impacts swiftly. KTB maintains an FY14 fee income growth target range of 14-15%, driven by bancassurance and mutual fund sales commissions, trade finance and remittances. But we are slightly less bullish, assuming FY14 fee income growth of 12%.

2H14 NIM will decline in tandem with stronger corporate lending

Management guides for an FY14 NIM of 2.6-2.7%, flattish YoY, despite the BOT’s policy interest rate cut of 25 bps on March 12 to 2.00%. KTB expects its 2H14 NIM to dip slightly as it shifts its lending focus from small SME and retail business to corporate and high-grade SME lending. Note that we assume a NIM of 2.65% in both FY14 and FY15 if the policy interest rate remains 2% through to YE15. An interest rate up-trend in FY15 would mean scope for upside to KTB’s NIM and profit.

Less need for FY14 LLPs would boost earnings  

The bank is now less aggressive over small SME and retail lending—both categories were impacted by the weak state of the economy in 1H14 and the recovery has yet to build steam. However, management expects the NPLs/loans ratio to be posted at 2.9% for end-Sept, flattish QoQ. KTB guides that 3Q14 LLPs will be at a normal level of about Bt2.1bn. Our model currently assumes LLPs of Bt11bn in FY14, down 11% YoY.

Anticipate good 3Q14 earnings growth, due to lighter LLPs

We expect the bank to deliver 3Q14 earnings of Bt9.9bn, up by 11% YoY and 31% QoQ, driven by lighter YoY LLP-setting and ongoing loan growth. Our model assumes LLPs of Bt2.1bn for the quarter, down by 37% YoY and 60% QoQ. We expect pre-provision operating profit to post a small rise of 2% YoY, driven by loan growth of 8% YoY and a NIM of 2.8% (flattish YoY), a little fatter than our mean NIM assumption for the full year).