Krung Thai Bank

Krung Thai Bank Plc (KTB) 

 

Investment thesis

We attended KTB’s analyst meeting yesterday. Management guides that the outlook for 2H15 is on a gradual improvement trend, supported by better corporate lending and less extra loan-loss provision (LLP) from 1H15. Based on the guidance, we feel comfortable with our earnings forecast of Bt28bn (down 16% YoY) in FY15 and Bt36bn (up 29% YoY) in FY16. Again, there would be scope for upside to our FY15 projection if KTB were to set lower LLP than was modeled, due to well managed NPLs during 2H15. Given its better lending outlook and healthier asset quality control, we maintain our YE15 target price of 19.00, pegged to a justified PBV of 1.1x (below its long-term mean of 1.3x). Our TRADING BUY rating stands.

Better 2H15 lending growth from corporate loan demand

KTB posted poor loan growth of 1.4% YTD during 1H15, which was below the management guidance range of 5-7%, due to delay in demand for big-ticket loans among state agencies and SOEs. However, management anticipates that 2H15 lending growth could be better from corporate borrowers (property and petrochemical sectors) and big SMEs. This could bring its loan growth to 5% (the low band of the bank’s guidance) and another 5% (from SOE and governmental projects) next year.

FY15 NIM will be sustained YoY from change in loan mix

The bank anticipates that its FY15 NIM target of 2.7% might be sustained because the bank has switched its lending focus to higher-yield rates such as borrowers in the SME and retail sectors, both of which provide lending rates higher than government and corporate loans. Now its retail loan commands 37% of total loans, up from 35% at YE14, whereas its SME loan portion grew to 21% from 19% at YE14. In turn, its corporate loan portion dipped to 35% at the end of June from 37% at YE14, while the government loan portion declined to 7% from 9% at YE14. However, we maintain our NIM assumptions of 2.6% in FY15 and 2.7% in FY16.

LLP should return to normal in 2H15, in line with our model

After setting extra LLP of Bt7bn in 1H15, KTB management does not expect to set large amount of extra LLP in 2H15 as its new NPL formation will decline from 2Q15. Besides that, its loan-loss-coverage ratio rose to a record high of 125% at the end of June from 115% in the last quarter. Hence, we maintain our FY15 LLP assumption at Bt20.5bn, up 50% YoY. Note that KTB management mentioned that one of its corporate loans (may be SSI) is now fully set aside for LLP to suit Bank of Thailand (BOT) requirements. Therefore, if the bank sets lower LLP than our model in 2H15, there is scope for earnings upside in 2H15. Its 1H15 LLP was Bt11.2bn, climbing 17% YoY and representing 55% of our FY15 forecast.