Kiatnakin Bank

Substantial scope for growth

Kiatnakin Bank Plc (KK)

Investment thesis

We have raised our KK earnings projections by 9% to Bt4bn for FY13 and by 10% to Bt4.6bn for FY14. Our upgrades were prompted by stronger 4Q12 fee income than modeled, boosted by the merger with PHATRA. Our fee income assumptions rose 10percent for both FY13 and FY14 to Bt2.9bn and Bt3.3bn, respectively. Due to the higher earnings projections, our YE13 target price increases 11% to Bt60, pegged to a YE13 PBV of 1.47x. Given 15% upside to our new target price, our TRADING BUY rating stands.

FY13 ROE target range of 13-15.0%

KK's FY13 ROE target range is 13-15percent following ROE of 13% last year. Management said synergies from the KK-PHATRA merger will expand profitability—mostly fee income (investment banking, securities brokerage commissions and wealth management). That should also bring down its FY13 cost/income ratio.

Ambitious FY13 loan growth target of 19%

Management aims to achieve its 19% loan growth target through HP and SME business after posting 24.5% expansion for last year. HP currently comprises 72% of KK's total portfolio. Management anticipates 16% expansion in this category in FY13, while its SME loans (only 23% of total loans) are targeted to jump 34%. The bank guides for a conservative loan spread of 3.7%, down from 3.9% in FY12.

Loan loss provisioning should decline

KK said that its current loan loss coverage ratio is 110%, which is above its comfort zone of 100%. Therefore, its loan loss provisions (LLPs) should decline this year. Note that KK set LLPs of Bt1.6bn in FY12. We project FY13 provisions of Bt1.3bn, down 16% YoY. KK targets an NPLs/loans ratio range of 3.0-3.5%; it was 3.3% at YE12.

Fee-based income has strong potential for growth

Synergy-building enabled by the KK-PHATRA merger will drive fee income growth this year—capital market activities, such as brokerage commissions, IB fees (from financial advisory and underwriting) and proprietary trading. Note that Phatra Securities was named financial advisor and underwriter for the BTS's Bt70bn infrastructure fund. The fee income from this deal (financial advisory and underwriting fees) will be recognized in 1Q13. We have revised up our KK FY13 and FY14 fee income assumptions by 10percent for both years to Bt2.9bn and Bt3.3bn, respectively.