Kasikorn

Q4 2012 preview: Good earnings

Kasikorn Plc (KBANK)

Investment thesis

We reiterate our BUY rating on KBANK,, premised on: 1) continuing loan growth of 9-11% in FY13, 2) NIM sustainability, 3) good asset quality management—a low NPLs/loans ratio of 2.2% and a high loan loss coverage ratio of 143%—and 4) rising operating efficiency, which will bring down its FY13 cost/income ratio to 45percent from 46% last year. We project earnings of Bt34.2bn for FY12 and Bt43.9bn for FY13. KBANK's FY13 outlook is good, driven by rising M&A deals and public spending on mass transit and flooding protection systems. There is likely to be scope for lending and profit growth in excess of our model.

Good 4Q12 lending growth

KBANK said 4Q12 loans will post strong QoQ growth, led by the retail and corporate categories. Note that its 11M12 net lending rose 9.5% YTD. The bank targets FY13 loan expansion of 9-11% (close to last year). For FY13, corporate business is set to rise 4-6%, SME by 10-12% and retail by 10-13%. We model for loan growth of 10% this year. In the meantime we project 4Q12 lending expansion of 5% QoQ and 12% YTD, driven by the retail and SME categories.

4Q12 NIM will be 3.4%

Management expects 4Q12 NIM of about 3.4%, close the number posted for the third-quarter. The bank views that FY13 NIM will rise slightly YoY because of its emphasis on high-yield retail and SME lending. Management guides that it will fatten from 3.4-3.5% in FY12 to 3.4-3.6% this year. KBANK also expects the BOT's policy interest rate to fall to 2.5% by YE13. We model for NIMs of 3.4percent for FY12 and 3.6percent for FY13

Bigger 4Q12 Loan loss provisioning

KBANK plans to set bigger loan loss provisions (LLP) of Bt8.4bn in FY12 (about Bt2.1bn/quarter). The implication is that it will set 4Q12 LLPs of 2.6bn (9M12 LLPs totaled Bt5.7bn). Our FY12 assumption was only Bt7.8bn. However, the bank also plans to set specific loan loss provisions in order to claim tax credits for the quarter. As such, its effective FY12 corporate tax rate would be only 22% (our assumption was 24%), which would more-or-less offset the effect of high LLPs in FY12. We, therefore, maintain our FY12 earnings projection of Bt33.1bn. The bank plans FY13 loan loss provisions of Bt2bn/quarter (in line with our assumption).

Anticipate good 4Q12 earnings

Given a sustained NIM, lending expansion and greater fee income in 4Q12, we conservatively model for a 4Q12 profit of Bt6.6bn, down 28% QoQ on seasonality and higher marketing spending, but up 119% YoY.

Outlook

Strong YoY profit growth in 4Q12: We forecast a 4Q12 net profit of Bt6.6bn, up by 119% YoY (but down 28% QoQ on seasonality—high expenses are traditionally booked in the final quarter of the year). The YoY bottom-line growth is due to lending expansion of about 12% YoY, higher fee income and a very low effective tax rate of 20%. Our model indicates that KBANK's cost/income ratio dropped to 54percent for the quarter from 56% in 4Q11 (but up from 44% in 3Q12, due to seasonality—end-of-the-year expense recognition). Note that its effective 4Q12 corporate tax rate will fall with the use of tax credit items, such as for specific loan loss reserve provisioning—we now assume 20%.

Good 4Q12 lending growth: Management said that FY12 lending will exceed its target range of 9-11%; note that 11M12 loans grew by 9.5% YTD and 11% YoY. We project 4Q12 lending expansion of 5% QoQ and 12% YTD, driven by the retail and SME categories. The bank targets FY13 loan growth in the range of 9-11%. The SME and retail categories are the main focuses. Note that corporate business is set to rise only 4-6% in FY13 (mostly related to real estate, energy and technology), SME by 10-12% (led by provincial areas—automotive, electronics and agriculture) and retail by 10-13% (the bank is expanding its mortgage footprint from 14 provinces last year to 19 provinces with growth targets of 5-8percent for loans, 11-14percent for P-Loans and 15-17percent for credit cards in FY13). We model for FY13 total loan growth of 10%.

4Q12 NIM was 3.4%: Despite stronger loan growth, KBANK guides that its 4Q12 NIM will be 3.4%, close to the number posted for the third-quarter. SME and retail were the drivers. FY13 lending growth will be dominated by SME and retail business. There is scope for yield expansion. Management guides that its FY13 NIM will be 3.5-3.6percent following a NIM in the range of 3.4-3.5% last year. We assume NIMs of 3.4percent for FY12 and 3.6% in FY13.

Stronger LLPs for 4Q12: KBANK plans to set bigger loan loss provisions (LLP) of Bt8.4bn for FY12 (about Bt2.1bn/quarter). The implication is that it will set 4Q12 LLPs of 2.6bn (9M12 LLPs totaled Bt5.7bn). Our FY12 assumption was only Bt7.8bn. However, the bank plans to set specific loan loss provisions in order to claim tax credits for the quarter. As such, its effective FY12 corporate tax rate would be only 22% (our assumption was 24%), which would more-or-less offset the effect of high LLPs in FY12. We, therefore, maintain our FY12 earnings projection of Bt34.2bn. The bank plans FY13 loan loss provisions of Bt2bn/quarter (in line with our assumption). Note that KBANK expects post a YE12 NPLs/gross loans ratio of 2.2%, which would be comfortably below its internal policy ceiling of 2.7%.