Kiatnakin Bank

Up 2013's forecast. New FV is B70. Market booms, IB brightens BUY

Kiatnakin Bank Plc (KK)

Rising star. Synergy from merger with PHATRA benefits both securities and IB

The management of KK and PHATRA has given the vision for the business

outlook in 2013, which is still consistent with the company's intention to create a

business synergy, particularly for the capital market business under PHATRA's

operation, including investment banking, investment & trading, and private

wealth, which has shown more aggressive growth in 2013. With the currently

bright capital market, we are confident that fee income from the IB business

would continue its notable growth from 2012, starting a new year with a financial

advising deal for BTS infrastructure fund (the income will be recognized in 2Q13)

and many other projects in hand. For the investment & trading business with the

current portfolio worth of B10bn, income is projected to increase from

investment management in a form of direct investment (portfolio) of B3bn with

average returns of around 20-25%, while the rest B7bn comprises 2 transactions

including 1) equity derivatives trading, which has been operating for more than 5

years focusing on finding a chance to create arbitrage for spread trading

(securities neutral), with an expected return of around 10-12% (before leverage)

and 2) hedge funds which have just started the operation recently focusing on

making market neutral by using program trading, with an expected return of

around 10-15% (before leverage). All these businesses don't need much

investment and staff expense but would give worthwhile returns. Under KK's

capital of B30bn at present, PHATRA will be able to expand the risky transactions

significantly from present. For the banking business under KK's operation, 2013's

outlook might be dull. Loan growth in 2013 might decelerate from last year to

only 19%yoy, especially for car hire-purchase loan as the tax incentive has

ended (first-car scheme). Loan spread is anticipated to contract by 20bp due

mainly to the yield weakness after it widened unusually after the flood lenience

period ended. In addition, for the debt management business (SAM), the bank

has lowered its NPA sale target to only B2.5bn from B3.2bn in the past year, so

profit from NPA sale will decrease 22%yoy to B1bn.

Up 2013-14's forecast, cutting provision & increasing fee income. 2013' profit outshines peers

We revise up our profit forecast for 2013-2014 respectively by 7% and 9%,

mainly by increasing the fee income significantly by 56.3% and 61.6%,

respectively, and cutting the debt provision by 22.2percent for both years, with

average credit cost of around 70bp from the previously estimated 90bp. As a

result, 2013-2014's net profit is projected to grow remarkably respectively by

43.6%yoy and 18.2%yoy, the highest among peers (apart from TCAP which will

book non-recurring income of B7bn in 2013 from a sale of its investment in

TLife).

Reiterate BUY. New FV is B70, implying 35% upside.Dividend is attractive

We confirm our BUY recommendation. New 2013's fair value, using GGM, at 1.8x

PBV from 1.38x (under long-term ROE forecast of 17percent from 15%), is B70/share,

up from B53.52/share, implying 35% upside from the current share price.

Dividend yield is estimated at more than 5-6% p.a. on average (paying semiannually).

Dividend payment in 2H12 is projected at B1.40/share or a dividend

yield of 2.7% (payout ratio is 58%).