Krungthai Card

Krungthai Card Plc (KTC) 

 

Investment thesis

We attended KTC’s analyst meeting yesterday. Management sets the lender’s FY16 loan growth at 10%, spending growth at 15% but small earnings growth for the full year. The small profit growth for all of 2016 is due to higher OPEX for marketing campaigns to boost loans. In sum, we believe that our FY16 earnings are on par with the KTC’s guidance. Besides, KTC has scope for upside from cutting loan-loss provisioning (LLP) in FY16 as its loan-loss cushion remains high at 400%. Its current D/E is 5.9x, far below its debt covenant ratio of 10x and allows KTC to expand for a few years without the necessity for capital raising. Given the promising outlook and well managed asset quality, our TRADING BUY stands.

Target loan growth of  10% for full year 

Following the reported 10.3% YoY loan growth in FY15, management anticipates 10% loan growth for FY16. Its personal loans and credit card loans are set to rise 15% (against FY15 growth of 11.6%) and 10% (against FY15 growth of 10.15%) during the full year. Besides that, KTC aims to raise its credit card spending by 15% YoY in FY16 after it grew 12.3% last year. We conservatively forecast its loan growth to be 10% in for the full year of 2016 (in line with KTC’s target of 10%). 

FY16 earnings to decline from rising OPEX …

Again, KTC guides that its FY16 OPEX will be up moderately from FY15 due to its more extensive marketing campaigns (for boosting loan growth and total card spending) and higher cost from outsourcing of debt collection processes. The lender has sets its marketing budget at Bt1.2-1.3bn in FY16, up 25% from last year. Moreover, KTC hired Win Performance to handle its debt collection services, which could allow KTC to record rising bad debt recovery and lower LLP. Note that its FY15 bad debt recovery grew 15% to Bt2bn. We expect the firm will be able to sustain its bad debt recovery to the tune of Bt2bn this year. We expect its cost/income to stay at 51% for the full year and 53% in FY17.

… but still room for LLP cut amid high 400% loan-loss-coverage ratio 

KTC’s C-Suite views that its current loan-loss-coverage ratio of 400% might be too high. This will allow KTC to reduce its LLP setting in FY16, management said. Yet, KTC will refrain from a policy to write back its loan-loss reserve into revenue this year as economic conditions remain vulnerable. We also agree with this view and assess that this could provide scope for upside to earnings if the KTC cuts its LLP in FY16 lower than our model. We expect it to set FY16 LLP of Bt3.6bn (up 18% YoY) in FY16.