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Krung Thai Bank

2Q14 earnings missed target, due to heavy loan loss provisioning

Krung Thai Bank Plc (KTB)

2Q14 profit was 15% below our forecast

KTB posted 2Q14 earnings of Bt7.5bn, up 16% YoY but down 9% QoQ. The result was 15% below our estimate and the Bloomberg consensus, attributable to heavier loan loss provisioning than modeled (we expected 2Q14 LLPs of Bt4bn; the bank set Bt5.4bn). Pre-provision operating profit was Bt14.3bn, up by 8% YoY and 21% QoQ. 1H14 earnings represent 47% of our FY14 projection.

Results highlights

Lending rose by 2.5% QoQ and 5.8% YTD—more swiftly than our assumption. The growth was in corporate, state agency/SOE and SME business. The 2Q14 NIM was 2.88%, up by 13 bps QoQ and 13 bps YoY, driven by aggressive lending and boosted by the BOT's policy rate cut in late March and lower deposit rates. Loan loss provisions jumped by 29% YoY and 202% QoQ to Bt5.4bn. KTB's NPLs/loans ratio inched up from 2.87% at end-March to 2.91% (led by small SME and retail clients). Its loan loss coverage ratio grew to 113% at end-June from 106% three months earlier.

Fee income rose by 1% YoY and 2% QoQ to Bt5.2bn in 2Q14. OPEX was Bt10.3bn, up 12% YoY (down 10% QoQ). Because net interest income increased faster than OPEX, the cost/income ratio dipped to 45.3% at end-June from 52.4% three months earlier.

Outlook

We expect KTB's 3Q14 earnings to rise moderately QoQ on lighter LLP-setting (our forecast also implies modest YoY growth). Note that its NPLs rose 13% QoQ to Bt62bn at end-June.

What's changed?

Our FY14 net profit forecast stands unchanged at Bt32.8bn for FY14, down 3% YoY—NIM should expand a little in tandem with lending in 2H14. We expect an FY14 NIM of 2.64% down from 2.79% in FY13.

Recommendation

KTB should deliver FY14 earnings of Bt32.8bn, down slightly YoY because of heavy loan loss provisioning and the absence of revenue from Vayupak Fund-1 (the fund was wound up in November 2013). However, the stock looks cheap at a PBV of 1.38x compared with a sectoral mean of 1.5x (KTB's last PBV peak was 1.8x). Besides, its capital adequacy ratio of 15.58% (11% Tier-1 and 4.6% Tier-2 & 1H14 retained earnings) will enable it to lend aggressively in 2H14 onward without need for a cash call. Our BUY rating stands.


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