We have cut our KBANK profit forecasts by 2.5% for FY14 to Bt43.9bn and by 2.2% for FY15 to Bt50.9bn, due to heavier LLP assumptions prompted by the weak economy and prevailing political uncertainty. Thus, our YE14 target price falls by 6.6% to Bt207, pegged to a justified PBV of 1.68x. Despite our forecast cuts, we maintain our BUY rating, premised on: 1) earnings resilience to economic uncertainty, 2) good asset quality management (a low NPLs/loans ratio of 2.1% and big loan loss coverage ratio of 133%) and 3) a declining cost/income ratio trend, as core banking upgrading costs (the K-Transformation program) will end this year.
FY14 loan growth target range of 9-11%
Although management expressed concerns over the Thai economy, KBANK believes that its FY14 loan growth target range of 9-11% is comfortably achievable, based on 2014 GDP growth of 3.7%. The loan portfolio should grow on business tied to the electronics, food, commodity and retail industries. FY13 loan growth will be reported at around 9% (in line with guidance), said management. We model for loan growth of 9% for FY13 and 8% in FY14 (our FY14 number is more conservative than KBANK’s guidance).
Bank maintains FY14 financial guidance unchanged
So long as the ongoing political chaos is resolved by mid-year, KBANK believes that its FY14 financial guidance is achievable. It targets non-interest income growth of 15% (close to our model), NIM of 3.4-3.6% (we expect an FY14 NIM of 3.35%) and a cost/income ratio of 45% (close to our number). The NPLs/loans ratio should not exceed 2.2% at YE14. The bank will set loan loss provisions at a credit cost of 85 bps.
Our FY14-15 LLP assumptions rise, due to political risk
We have revised up our FY14-15 loan loss provisioning assumptions by 13% for each of the two years to Bt12.7bn (in both years). The higher LLP assumptions dampen our earnings forecasts by 2.5% to Bt43.9bn for FY14 and by 2.2% to Bt50.9bn for FY15. We believe that our new profit projections are relatively conservative.
QoQ slippage in 4Q13 earnings, due to heavier OPEX
We estimate a 4Q13 profit of 9.4bn, up 22% YoY but down 12% QoQ. The assumed QoQ decline in earnings is due to heavier OPEX, both QoQ and YoY. We expect a cost/income ratio of 51.5%, up sharply from 44% in 3Q13 because of seasonally heavy cost booking and NIM squeeze. We expect a 4Q13 pre-provision operating profit (PPOP) of Bt14.5bn, up 9% YoY but down 15% QoQ.