The prevailing political unrest and economic uncertainty has prompted us to cut our KTB FY14 and FY15 loan growth assumptions to 5% and 6%, respectively, from 7% formerly for both years. Hence, we have revised down our earnings projections by 2% to Bt32.8bn for FY14 and by 4% to Bt35bn for next year. As a result, our YE14 target price declines to Bt20.25 from Bt21.25, pegged to an unchanged justified PBV of 1.3x. There would be scope for upside to our FY14 projection if political unrest were to ease soon (which would boost lending tied to state infrastructure projects). Our TRADING BUY rating stands.
FY14-15 lending growth forecasts cut
Management cut its FY14 loan growth guidance to 4.5% from 5-7%, given subdued credit demand among state agencies/SOEs in the prevailing environment of political chaos and government dysfunctionailty. Note that we have cut our loan growth projections to 5% for FY14 and to 6% for FY15 from 7% for both years previously. KTB maintains an FY14 fee income growth target of 14-15% for FY14, driven by bancassurance and mutual fund sales, trade finance and remittance fees. We assume FY14 fee income growth of only 12%.
FY14 NIM to decline slightly YoY, due to policy interest rate cut
KTB anticipates that FY14 NIM will decline slightly YoY to 2.7% because of the effect of BOT’s 25 bps cut to its one-day Repurchase Rate on (March 12, 2014) to 2.00%. The bank expects another Repo Rate cut if the political unrest doesn’t ease by 2H14, which would probably mean downside on our FY14 NIM assumption. In our model, the FY14 NIM is 2.6%, but that assumes that the policy interest rate remains at 2% through to YE14.
LLP-setting will remain heavy in FY14
Although KTB had a high loan loss coverage ratio of 115% at YE13, it plans to build its loan loss coverage ratio further. The implication is that the bank may set extra loan loss provisions in addition to its normal level of Bt6bn/year in FY14 and FY15. Note that its FY13 LLPs totaled Bt12.3bn, down 19% YoY. Our model currently assumes LLPs of Bt11bn in FY14 and Bt12bn in FY15.
Weak 1Q14 earnings expected, due to heavier LLPs
We expect KTB to deliver 1Q14 earnings of Bt8.6bn, up 1% YoY (but down by 14% QoQ). The poor expected bottom-line is due to heavier YoY LLP-setting. The bank is likely to set loan loss provisions of Bt2.5bn, up 54% YoY. However, we expect that its pre-provision operating profit to post a modest rise of 8% YoY, driven by loan growth of 9% YoY, fee income expansion of 14% and a sustained NIM of 2.7% (close to the NIM reported for the same period last year).