Kasikornbank

Q4 2012's profit weakens qoq as expected. 2013 is another golden year; profit still makes new high BUY

Kasikornbank Plc (KBANK)

Q4 2012's profit softens qoq. Expense and provision increase.

NPL not worrying

KBANK announced 4Q12's net profit at B7.69bn, contracting 16.5%qoq but still

growing 153.7%yoy. Main factors that suppressed earnings in this quarter are as

follows. 1) Operating expense in 4Q12 has increased by 18.7%qoq and

10.7%yoy. Cost to income ratio hit the year's peak at 50.5% as expected, which

is not worrying as it resulted from a seasonal effect. At the same time, there was

also an increase in an expense on K-transformation project the bank had

previously revealed. 2) Debt provision in 4Q12 has hiked by 31.2%qoq and

22.6%yoy as expected, making credit cost in this quarter increase to 80bp, from

60bp on average in the past 3 quarters, following NPL that shifted more than

B3bn in this quarter (but overall in 2012 NPL still decreased continuously to

2.0% compared with a controllable level of no over 2.2% of total loans).

Moreover, it is the bank policy to set higher debt provision, so there is nothing to

worry. On the other hand, positive factors boosting earnings in this quarter are

as follows. 1) Net interest income has grown by 4.9%qoq and 13.9%yoy - as

expected, in line with net loan growth in 4Q12 at 3.1%qoq and 9.6%yoy on a

high season for corporate and SME loans. NIM in this quarter still stabilized from

the prior quarter at 3.47%. 2) Other fee income has escalated by 8.4%qoq and

38.2%yoy - better than expected, mainly from the growth of transactional fees

during the high season. However, the negative factors still have relatively larger

weight than the positive ones, so there is still pressure on the net profit of the

bank in this quarter. Overall, net profit in FY2012 stood at B35.2bn, growing

45.5%yoy, making a year high.

To focus on superior services to increase market share in 2013

We still have positive outlook toward the bank's business in 2013 according to

the vision of the bank's CEO given at the recent analyst meeting, with supports

from its success in mega projects for improving human resources and IT system

(K-transformation) to comply with the bank's strategy of customer-centric. As a

result, KBANK now has a data center that allows it to offer satisfying financial

products for customers rapidly through various selling channels. For the business

plan in 2013, the bank will balance between the growth and the asset quality,

targeting for the net loan growth at the same level of 2012 at 9-11%yoy,

emphasizing on high yield loans (SMEs and retails) instead of corporate loans

which would show less growth from 2012. Accordingly, NIM is projected to shift

slightly by 3.4-3.6%. Moreover, cost to income ratio would decrease to 45-46%

due to lower burdens from K-transformation investment which is in the end of

the phase. All these positive factors help offset adverse effects from a projected

decrease in fee income growth (from corporate loans) and an increase in debt

provision from stricter policy. Accordingly, net profit growth of 23.4%yoy is still

anticipated in 2013, under long-term ROE's forecast of 21.7%.

Top pick of big banks. To outperform continuously in 2013

We recommend buying KBANK and select it as a top pick of the sector. 2013's

fair value, based on 2.64x PBV (GGM) is B237.33. Although the current share

price has 2013's PBV of 2.1x, compared with other banks in Indonesia, Malaysia,

and the Philippines of which the PBVs are substantially higher than 2x, KBANK is

still a target of foreign investors during the period of massive fund inflow.