Krung Thai Bank

Investment thesis

During our conference call with KTB management last week, it guided that its lending outlook for 2H15 is uncertain due to slower economic recovery. Thus, we have maintained our FY15 loan-loss provisioning (LLP) figure of Bt25.5bn to reflect KTB’s objectives to protect against a possible rise in NPLs (plus the Sahaviriya Steel Industry [SSI] case) if economic conditions fail to recover as expected. Besides that, our FY15 bank loan growth forecast of 5% has downsides from its more conservative policy. Nevertheless, our FY15 profit forecast of Bt24bn remains unchanged. KTB’s target price is maintained at Bt18.20, pegged to YE15 PBV of 1.1x. Our HOLD rating stands.

Earnings for 3Q15 to plummet on bigger LLP, caused by SSI debt

We forecast KTB to deliver 3Q15 earnings of Bt6bn, down 35% YoY and 29% QoQ. The poor earnings will be attributable to poor loan contraction of 1% and bigger LLP setting. Note that the bank expects its 3Q15 LLPs to be Bt8.1-8.5bn, mostly over the bad debt of SSI. The bank’s loan-loss-coverage ratio could drop from 125% to 100%, management conveyed. Its 3Q15 NIM will be 3%, close to last quarter. However, its fee income could grow 14-15% from FX gains, and cross-selling of financial products, such as bancassurance, mutual funds, and ATM cards.

Earnings for 4Q15 could fade further on high LLP setting

Although, KTB gave us no clues on its LLP guidance for 4Q15 and next year, management expects it will increase provisioning somewhat, due to a slower economy and some qualitative LLP. The high LLP in 4Q15 should remain to build up its loan-loss-coverage ratio to 120-125% as the same rate in 2Q15. Hence, we expect its 4Q15 earnings will be poorer from last quarter, caused by high LLP and large OPEX booking.

Scope for upside if KTB goes for aggressive lending with low LLP

Management anticipates FY15 loan to grow 3-5% with expected NIM of 2.7-3.0%. However, we have seen scope for its FY15 earnings growth upsides from better loan growth than 5% in FY15 and FY16 (our forecast numbers are 5% in both years) to support SOEs and stimulus packages, such as soft loans for SMEs. Moreover, if the bank decides it is in no hurry to build up its loan-loss-cushion ratio to 120-125% in 4Q15 and beyond 125% in FY16 as noted above, we expect the bank will post stronger earnings than modeled in 4Q15 and FY16. Now, we have maintained our earnings forecast of Bt24bn in FY15 and Bt36bn in FY16.