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4Q15 earnings were 19% below our numbers

KTC reported a 4Q15 profit of Bt535m, 26% upward YoY and 7% QoQ. The result was 19% below our forecast due to bigger OPEX. KTC set its OPEX of Bt1.69bn: we expect its OPEX to be Bt1.56bn. Its pre-provision operating profit rose 6% YoY and 6% QoQ to Bt1.51bn. Earnings for FY15 grew 18% YoY to Bt2.1bn, which represents 94% of our earnings projection.

Results highlights

Its net loan portfolio was up 9.2% QoQ and 11.1% YoY to Bt55.7bn at end-Dec. Meanwhile, KTC’s net interest margin inched up 11 bps QoQ to 22.85% in 4Q15, driven by lending growth. OPEX expanded 14% YoY and 7% QoQ to Bt1.69bn. KTC set net loan-loss provisioning (LLP) of Bt834m for 4Q15, down 6% YoY but up 4% QoQ. The 4Q15 NPL/gross loan ratio was slightly down to 2.1% at YE15 from 2.2% previous quarter. Its loan-loss-coverage ratio was 393%, unchanged from last quarter.

Outlook

Again, we have a neutral view for KTC’s prospects for 1Q16 onward after it maintained good asset quality and strong loan growth in 4Q15, despite the weak economic conditions that prevailed during much of FY15. We expect its 1Q16 profit to flat YoY on rising OPEX and lower fees from debt collections.

What’s changed? 

We cut our FY16 earnings by 8.5% to Bt2.15bn to reflect rising OPEX for business expansion.

Recommendation

We view that higher OPEX for business expansion and slower economic recovery in 1H16 might hurt its 1H16 earnings. We forecast its FY16 profit to rise only 4% to Bt2.15bn (revised down by 8.5%). Thus, we cut our FY16 target price of KTC by 13% to Bt99/share, pegged to a justified PER of 12x. We have seen only scope for upside from: 1) inorganic growth through acquisitions for a larger personal loan portfolio) and 2) lower-than-assumed net LLP as its loan-loss-coverage ratio was high 393% by YE15. The stock trades at a FY16 PER of 10.5x against a long-term mean of 12.9x. Given the better outlook for 2H16 due to governmental stimulus packages, we maintain a TRADING BUY rating on the stock.