Kiatnakin Bank

Q4 2012's profit to grow robustly despite increasing provision. Supported by fee income from PHATRA BUY

Kiatnakin Bank Plc (KK)

4Q12's profit to grow robustly despite increasing provision. Loan and fee income outshine

We estimate 4Q12's net profit at B1.11bn, growing 19.7%qoq and 74.6%yoy.

Pressuring factors in this quarter are 1) debt provision which is projected to

escalate more than 35.7%qoq and 24.9%yoy from the bank's policy of raising its

coverage ratio from 104% to be equal to the sector's at 111.4% at end-3Q12

and 2) profit from NPA management which is anticipated to decrease to B300m

in this quarter (from B386m in 3Q12). However, norm profit is estimated to grow

significantly by 25.4%qoq and 64.4%yoy due to following contributions. 1) Net

interest income is projected to thrive by 6.7%qoq and 22.1%yoy in 4Q12 due to

benefits from aggressive loan growth of 6%qoq and 25.2%yoy, led by car hirepurchase

loans (old car:new car is 50:50) especially for second-hand pick-up

cars in upcountry which gives high returns and is a strong point of KK. At the

same time, SME loans which are mainly for apartment operators could still show

impressive growth though not as remarkable as the car hire-purchase group.

Overall, net loan for FY2012 is projected to grow by 25.2%yoy, exceeding our

target of 22.1%yoy. Moreover, NIM in this quarter will still stabilize qoq at

3.13%. 2) Fee income in 4Q12 is anticipated to grow 69.9%qoq and 138.2%yoy

due mainly to a benefit from financial advisory income from PHATRA for a deal of

PTTEP and TLGF at B400-500m in total. 3) Cost to income ratio in 4Q12 is

projected to decrease to 45.8percent from 49.7% in 3Q12. Although operating

expenses in this quarter would grow as large as 5.9%qoq and 15%yoy on a

seasonal effect, the income has grown at a more accelerated growth so it would

be beneficial to the cost to income ratio in this quarter. Nevertheless, the

forecast has still not included a possibility that the bank will eliminate goodwill

impairment of B4.7bn from M&A with PHATRA from the financial statement, as it

is still not clear whether it will take place within 4Q12. Accordingly, this is a risk

that the earnings in 4Q12 might differ from our forecast. Overall, we estimate

net profit for FY2012 to make a year- high at B3.43bn or the growth of

20.1%yoy, higher than our current forecast by 5.2%.

Positive outlook in next 3 years under appropriate synergy

We still have positive outlook toward the business strategy in the next 3 years

under an appropriate merger model of the 2 organizations. KK will focus on the

business of its expertise and also create value to existing business such as

through private client group. In doing this, it will introduce high margin products

to high net worth customers (>B30m each) such as structured products, offshore

services, or credit enhancement products which used to have a limitation about

capital from operation under securities company but is now able to operate more

under the bank which has stronger capital adequacy ratio. Similarly, for

investment banking group, the bank will be able to create value added to the

business immediately with PHATRA's advantage of the largest market share in

the capital market (equity offering and M&A) as well as expertise in generating

profit from investment business with diversified strategies such as arbitrage

trading strategy and systematic trading strategy. At the same time, the bank will

be able to expand to universal investment advisory and loan issuance business.




Reiterate "BUY". PBV, PER and div yield attractive in 2013

We reiterate our BUY recommendation. 2013's fair value, using GGM (long-term

ROE forecast of 13%) is B51.10. We are new reviewing our earnings forecast for

FY2013 to reflect the effect from the goodwill elimination after the issue becomes

clear.