Kasikorn Bank

Kasikorn Bank Plc (KBANK) 

 

Despite leading its peers in loan growth and non-NII growth, 2H15F profit is expected to be subpar, pulled down by a continued rise in NPLs and provisions and pressure on NIM from the SME support measures. We believe the 2H15F slump is already priced in and it is trading at an undemanding value (>1SD below historical par).   

 

Continued rise in NPLs and provision as expected. In line with earlier guidance and our estimates, KBANK expects a continued gradual rise in NPL ratio from 2.4% at 2Q15 to 2.6-2.7% at 3Q15 and 2.7-2.8% at 4Q15. It is keeping its credit cost target for 2015 up to 150 bps on total loans and expects its 9M15 credit cost to be 140 bps (vs. 128 bps in 1H15 and 154 bps in 2Q15), suggesting a QoQ rise in credit cost in 3Q15 and 4Q15.  We forecast its credit cost to rise to1.67% in 3Q15 and 1.87% in 4Q15. 

 

Outperforming loan growth. KBANK estimates 9M15 loan growth at 4-5% YTD, outdoing the sector’s average of 1.5-2%. Its 4.3% loan growth in 8M15 was 6.2% corporate loans, 4.3% SME loans, and 1.5% retail loans. YTD loan growth is largely from working capital loans. The bank maintains its full-year target at 6% vs. the sector’s average of 3%.  

 

NIM under pressure from SME support measures. KBANK expects 3Q15 NIM to be stable in QoQ, with 9M15F NIM of 3.6-3.7%. However, it expects 2015F NIM to be ~3.5%, the low end of its 2015 target of 3.5-3.7%. This suggests the SME support measures will exert a QoQ squeeze on NIM in 4Q15. Since 2014, KBANK has provided accumulated aid for clients worth in total Bt140bn, 6-6.5% of which are NPLs. The outstanding financial aid provided to clients is currently ~Bt95bn of which Bt85bn is for SMEs. The bank is now in the process of establishing a credit policy and criteria for granting soft loans to SMEs under the government’s SME measures, with an initial soft loan target of Bt30bn. Under these SME support measures, the Government Savings Bank (GSB) will extend loans to commercial banks at an interest rate of 0.1%, which the commercial banks will then relend to SMEs at interest of no more than 4%. This will give an interest spread on soft loans of 3.9%, below the normal SME loan spread.    

 

3Q15F preview: We estimate a 22% YoY and 15% QoQ fall in 3Q15F earnings to Bt9.8bn. We have factored in: 1) moderate loan growth of 1-2% QoQ, 2) stable NIM QoQ, 3) a 7% YoY rise but 8% QoQ fall in non-NII to achieve a 14% YoY growth for 9M15, 4) a QoQ rise in cost to income ratio to 45% in 3Q15 from 43% in 2Q15 and 5) a QoQ rise in credit cost (provisions/total loans) to 1.67% in 3Q15 from 1.54% in 2Q15 to line up with the guidance of 1.4% in 9M15. 

 

Keep KBANK as the sector pick because 1) it is expected to continue outperforming in terms of loan growth and non-NII, 2) it should benefit the most from the government’s SME support measures, 3) the completion of K-transformation this year is expected to bring in an improvement in cost to income ratio. However, the current value is at >1SD below the historical mean, fully discounting the 2015F doldrums.