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Krung Thai Bank

Continue setting higher provision HOLD

Krung Thai Bank Plc (KTB)

2Q14 earnings were much weaker than projected; KTB has

significantly increased its debt provision for many recently quarters.

Profit is expected to continue dropping in 2H14. The current share

price barely provides upside.

- 2Q14 profit weaker than expected due to provision

KTB’s 2Q14 net profit was reported at B7.54bn (14.4% below expectation),

dropping 9.1%qoq. Debt provision increased significantly; KTB has

determined to increase its monthly normalized provision from B500m to

B700m and set additional provision of B3bn, thus raising NPL coverage ratio

to 113.1% at end-2Q14 (still lower than the sector’s average coverage ratio

of over 130%). KTB’s income from core business (net interest income, fee

income and non-interest income) grew at the faster rate than expected.

Meanwhile, operating expense dropped at a slower rate than expected,

negated by rapid growth in overall income. As a result, 2Q14 cost to income

ratio was 41.6% (mainly thanks to lower personnel expense). 2Q14 net loan

growth was 2.5%qoq (as expected), thanks to rebound in every type of

loans. 2Q14 NIM rose to 2.83%, thanks to higher loan yield and lower

funding cost.

- Profit to weaken in 2H14

We maintain our earnings forecast for 2014-2015. FY2014 net profit is

projected to contract 12.3%yoy because there is not extraordinary income

from a sale of its investment in Vayupak fund like in 2013 and also no

longer dividend income from the fund, which could not be compensated by

the growth of core business. In addition, earnings in 2H14 might weaken

from 1H14 because of increasing debt provisioning expense to increase the

coverage ratio.

- HOLD for dividend

We reiterate HOLD for dividend. The current share price barely provides

upside from FY2014 fair value (1.34x PBV, 14.1% long-term ROE forecast)

of B21.25.

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