Kasikornbank

Investment thesis

We attended KBANK’s analyst meeting on Friday at which executive vice president and chief investor relations officer Dr. Adit Laixuthai passed on that the bank’s 1Q16 operations remained weak from higher NPL and bigger loan-loss provisioning (LLP) in 1H16 before improving in 2H16. This is on par with our FY16 earnings expectations. However, slower economic recovery in 2H16 might cause downside risk to our FY16 profit forecast from possible rises in NPL and LLP. We would like to see its 1H16 performance before our earnings forecast and recommendation changes. We, thus, have maintained our HOLD rating at the moment.

Bigger NPL ratio to 3% in 1Q16 as guided but downside remains

KBANK viewed that its NPL ratio could rise from 2.7% at YE15 to 3.0% in 1Q16. The rising NPL ratio trend was on par with its FY16 guidance of 3.5-3.6%, management said, adding that it expected its 1Q16 LLP to be slightly up from last quarter because NPL formation remained on the rise but at a steadier rate than last quarter. Thus, its LLP would be high in 1H16 before dipping in 2H16, it said. We, thus, forecast that KBANK will set aside LLP of Bt9bn, soaring 125% YoY and 2% QoQ. 

Reaffirm FY16 loan growth target of 6-7% but NIM under pressure 

The institution guided that its loan growth target of 6-7% was achievable from corporate and retail lending. Note that its 2M16 loans grew 0.8% YTD, driven by corporate loan growth of 2% YTD. SME and retail loans were flat YTD. Also, management expected its NIM might have a downside to stay on the low target range at 3.4% (from FY16 NIM target of 3.4-3.6%) due to the possible cut in policy rate in 2H16 if economic conditions turn out slower than expected. Our loan growth forecast is 7%, with anticipated NIM forecast of 3.48% in line with KBANK’s number. We see some downside in our loan growth and NIMs if the FY16 economy is worse than modeled.

Expect 21% YoY drop in 1Q16 earnings from bigger LLP

We anticipate KBANK to post FY16 earnings of Bt9.8bn, plunging 21% YoY. The drop will be caused by bigger LLP setting as stated. However, we forecast that its pre-provision operating profit could rise by 7% YoY and 17% QoQ to Bt22bn from rising loan growth, higher net non-interest income and well managed OPEXs. We expect its 1Q16 cost/income ratio to stay at 43% against its FY16 number of 45-47%. 

We also expect KBANK to post an earnings contraction YoY during 1H16 before posting medium growth in 2H16 from better lending growth and declining LLP from 1H16. The bank plans to diversify its services into AEC+3 to build new foundations for growth into its long-term strategy. These services will include FDI and cross-border trade. The new offshore investment (mostly in IT systems) means new OPEX. Hence, We expect its FY16 cost/income ratio has a downside to rise from our number of 45% in FY16 and FY17.