Krung Thai Bank

What’s new?

Yesterday, Moody’s Investors Service raised KTB’s bank financial strength (BFS) rating to D+ from D. The rating agency maintains a stable outlook for the bank and also maintains unchanged its long-term rating at Baa1 and its foreign long-term deposit rating at Baa1. The BFS rating upgrade reflects strong Thai government support, greater Tier-1 capital and good asset quality management.

Upgrade was no surprise, given solid fundamentals

KTB’s financial performance has improved since last year. At end-October it posted 5.8% YTD loan growth and its Tier-1 capital adequacy ratio had risen to 11.2% from 10.2% at YE13. In addition, the new government is moving to accelerate budget disbursement and institute a stimulus package. KTB, plays a role helping the govt implement policy, so stands to benefit most from new state agency borrowing. The Ministry of Finance holds 55% of the bank.

Note that we assume loan growth of 7% for both FY14 and FY15. Given that KTB has achieved the swiftest 10M14 loan growth in the sector, we see scope for upside to our current model. In FY15 lending growth (especially corporate, SOE and SME) should accelerate YoY, driven by improved macro-economic factors. 

Loan loss provisions will rise slightly in tandem with loan growth

KTB aims to reduce 4Q14 LLP-setting to a normal level of about Bt700m/month following heavy provisions of Bt9.97bn for 9M14. At end-September, its loan loss coverage ratio was 108% and it had a low NPLs/loans ratio of 3.1%. We assume FY14 LLPs of Bt11bn, down 10.5% YoY. The bank is likely to set heavier LLPs in FY15 of Bt12bn, up 9% YoY, in tandem with stronger lending growth. At end-September, KTB’s loan composition could be categorized into corporate:SME:retail:state agency in the proportions 38:19:35:8, respectively.

Investment thesis

We expect the bank to deliver further good lending growth in FY15, due in part to the role it plays financing state agency infrastructure projects. Besides, its capital adequacy ratio of 15.4% (11.2% Tier-1) will allow it to lend aggressively for at least several years without need for capital-raising. The stock currently trades at inexpensive PBVs of 1.4x for YE14 and 1.2x for YE15 (its long-term mean); its last peak was 1.7x in 2013 (up 1.5SD). We have a BUY call on KTB.