Kiatnakin Bank

Kiatnakin Bank Plc (KKP) 

 

- 1Q15 profit rebounds as projected, but asset quality remains bad  

 

KKP posted 1Q15 earnings result with net profit of B664m as projected, rebounding as much as 42.6%qoq (though still contracting 8.1%yoy) and accounting for 24% of FY2015 net profit forecast. Provision for bad debts decreased significantly in this quarter after the bank had already made massive provisioning in 4Q14 to increase its coverage ratio (LLR/NPL). However, NPL has increased B1.46bn to 6.34% of total loans in this quarter (separate financial statement), resulting in the coverage ratio dropping below 80% again. In addition, incomes from other operations also increased, e.g. Fx gain and other incomes, thus helping alleviate weaker performance of the core business, especially net interest income that has decreased following declining loans, mostly car leasing, and significantly shrinking NIM. Operating expense also increased, mostly loss from selling foreclosed assets, i.e. repossessed cars, and loss from revaluating foreclosed assets. 

 

- Maintain forecast. Driving factors still weak  

 

We maintain FY2015-2016 earnings forecast, estimating net profit growth of only 6.8%yoy and 17.0%yoy, respectively. Car leasing business is projected to start reviving in 2H15 since it needs time for adjustment after significantly increasing supply of new cars in 2012-2013. In addition, provision for bad debts will have to be increased throughout 2015 in order to make KKP’s NPL coverage ratio equal to peers’; this will negate the benefit from the rebound in the banking and capital market businesses. 

 

- Switch to TISCO for better rebound and higher dividend  

 

We recommend selling KKP. The current share price has gotten close to 2015 fair value of B38.95 (GGM, based on 0.93x PBV, under long-term ROE forecast of 11.0%). Total return including 4.8% dividend yield expected in 2015 provides only 5.5% upside. Investors can switch to TISCO for its quicker business recovery and higher dividend yield.