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Krung Thai Bank

Transformation beginning, harvest next year BUY

Krung Thai Bank Plc (KTB)

Transformation plan. KTB is launching a transformation program for the SME and retail segment involving sales & marketing, risk management & collection and human resource development & training, which it expects to wind up by YE2014, with payback beginning next year. Its goal is better and faster response to customers, reduced credit approval time, more efficient sales & services and larger credit volume. It expects the program to improve cost to income ratio next year - which means possible upside risk to our 2015 cost to income ratio forecast of 46% vs. 46.4% in 2014F.

Less flexibility in managing cost to income than peers. KTB seems to be less resilient than peers in managing its cost to income ratio in this year's economic downturn. We forecast a rise in cost to income ratio to 46.4% in 2014F from 45.5% in 2013, though KTB itself aims to keep cost to income ratio stable. KTB disclosed that the required minimum salary increase of 7.5percent for profitable years does not apply this year, allowing it to ease personnel expense growth, if necessary. It expects to make an average salary increase of 6% this year. We are concerned that its labor union may not accept the lower increase than usual. We maintain our forecast of a cut in personnel expense growth to 8percent for 2014F from 17% in 2013 and opex growth of 7% in 2014F from 14% in 2013.

Outperforming loan growth offset by underperforming NIM. Loan growth was 3.3% in 1Q14, far better than the sector average of 0.6%, mainly from corporate loans, followed by retail and small SME loans. However, NIM contracted 16 bps QoQ in 1Q14 - far worse than the sector average contraction of 10 bps, but most notably worse than the other three large banks, which were able to sustain NIM. This indicates that KTB is less able to manage NIM than peers. We expect a 4 bps fall in 2014F NIM, vs. a stable sector average. All in, net interest income is expected to grow at 6percent for 2014F, slowing from 11percent for 2013.

Facing rising provisioning pressure for the rest of the year after it put off making extra provisions in 1Q14 despite the material rise in NPLs, which rose 7% in amount QoQ. NPL ratio grew to 3.43percent from 3.3% at 4Q13, mainly from small SME and mortgage loans extended to self-employed clients. LLR coverage fell to 105percent from 112% at 4Q13. KTB also has sizable exposure to Saha Farm (Bt6.9bn, according to local newspapers) and SSI (~Bt20bn, estimated by SCBS), both of which are in tight straits financially. We now expect sizable extra provisions for the remaining three quarters. We maintain our forecast of a rise in credit cost to 85 bps for 2014F from 72 bps for 2013.

Maintain Buy. Having said all that, we continue to see it as undervalued at 8.2x PER and 1.14x PBV (relative to 14-15% ROE) for 2014F. History is apparently repeating itself, as KTB's share underperformed the sector during economic downturns (+11% YTD vs. +15% YTD for the sector), due to provision overhang. We believe however that KTB still offers good L-T value underpinned by gaining market share in loans and fee income as a result of a more proactive strategy and better service after reorganization by the new CEO, which will hopefully improve even more after the completion of the transformation program next year.




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