Krungthai Card

Investment thesis

We hosted KTC executives, Mr Chutidej Chayuti (SEVP) and Ms Apisama Na Songkhla (SVP) on a local NDR. The firm targets loan growth of 10-15% and earnings expansion of at least 10% for FY15. Its financial targets are in line with our numbers. Hence, we maintain our profit forecasts at Bt1.68bn for FY14, up 30% YoY, and Bt1.85bn for FY15, up 10% YoY. There would be scope for upside to our model from: 1) stronger lending growth than assumed (a consumer spending recovery in 4Q14 and in-organic growth through acquisitions) and 2) lower net loan loss provisions than assumed. The stock trades at an FY15 PER of 8.3x against a long-term mean of 12.9x. TRADING BUY!

FY15 earnings growth of 10-15% targeted

The executives said that earnings growth will be driven by lending growth of 10-15% next year—personal loans and credit cards. The firm plans to boost personal loans in 4Q14 through both organic and in-organic means. Next year, KTC also aims to add 400k new credit card accounts (it currently has 1.8m credit card accounts). We, conservatively, forecast gross loan growth of 8% in FY14 and 8% in FY15, driven by personal loans. We expect NIMs of 20.6% in FY14 and 22.6% in FY15.

Lighter LLP-setting would mean scope for upside in FY15

Management guided that FY15 loan loss provisioning is likely to be lighter than the amount to be set for FY14 because KTC’s loan loss coverage ratio was 3.4x NPLs at end-September. Its NPLs/gross loans ratios declined from 2.2% at YE13 to 1.9% at end-September for credit cards and from 1.5% to 1.2% for personal loans. We, conservatively, maintain our net-LLP assumptions at Bt3.2bn for FY14 and 3.8bn for FY15. If LLPs were to be lighter than we assume, there would be scope for upside to our FY15 earnings forecast.

Heavier OPEX in 4Q14 and FY15 to drive portfolio growth

After implementing a cost-cutting program in FY13 and 9M14, KTC plans to increase marketing spending in 4Q14 onward in order to boost business growth—both personal loans (both organic and in-organic) and credit cards. Therefore, we expect OPEX to drop 5% in FY14 to Bt5bn, then increase 8% next year to Bt5.4bn. Our cost/income ratio assumptions are 49% for FY14 and 47% for FY15.

Adequate capital; no need for a cash call for 2-3 years

KTC’s net debt/equity ratio at end-September was 6.3x. That will enable the firm to expand its loan portfolio without need for a capital increase for at least several years. Note that the D/E ratio ceiling in its creditor covenant is 10x. We do not expect the firm to raise new capital next year. And KTC should maintain a dividend payout of 40% for FY14 and FY15.