- Loan growth beating the sector, but SME loan yield being pressured down
- Still top Buy with unchanged TP of Bt214
2Q14F preview – Still good. We forecast KBANK’s 2Q14 earnings to increase 9% YoY but be stagnant QoQ at Bt11.9bn. Our forecast is based on following 2Q14 guidance.
1. Loan growth: +3-4% YTD for 1H14 (vs. 2.4% in 5M14), translating to an acceleration in loan growth QoQ to 2-3% QoQ from 0.8% QoQ in 1Q14. KBANK maintains its 2014 target at below 8%.
2. NIM: Stable or up QoQ from 3.6% at 1Q14. Lower cost of funds from deposit re-pricing is expected to be offset by lower SME loan yield.
3. Non-NII: Easing off to single-digit growth YoY following the very strong +19% YoY in 1Q14, mainly on net insurance income and FX gain, which are expected to fall QoQ. KBANK maintains its 2014 non-NII growth target in the low teens.
4. Cost to income ratio: Up seasonally QoQ to > 40% for 2Q14 vs. 40% for 1Q14. Cost to income ratio is expected to up on a seasonal basis QoQ over the remainder of the year. KBANK maintains full-year cost to income target at mid-40%.
5. Asset quality: Following an abnormally high 101 bps in 1Q14, credit cost will ease QoQ to bring 1H14 credit cost down to 90 bps with unchanged full-year target at ~85 bps, reflecting a further easing in credit cost in 2H14. KBANK reports an insignificant increase in NPLs in 2Q14 and stands firm on its 2014 target at 2.2%.
Outperforming loan growth. KBANK’s 5M14 loan growth was 2.4%, outperforming the sector’s 1%; growth was primarily in corporate loans (+4.5%) and SME loans (+2.9%) and mainly in form of S-T working capital loans. Retail loan growth remained sluggish at 0.3%. We see upside risk to our loan growth forecast of 5% for 2014F and 9% for 2015F and 2016F, brought by a resumption of infrastructure projects.
SME loan yield slipping. SME loan yield is being put under pressure by two factors. First, KBANK has lowered its interest rate for 15,000 SMEs in tourism-related, contractors and agricultural-related businesses that have been hurt by the political unrest. In this scheme, KBANK lowers interest rate by 3 percentage points for three months (1 June– 1 August) for S-T borrowing and offers a 6-month debt moratorium for term loans. This helps improve its customers’ financial liquidity by 50%. This group of customers has not yet entered default but interest burden has been high at 9-18%. Secondly, the economic downturn has caused a shift in new lending from small SMEs to mid-sized: the small SMEs have apparently paid off their loans and are avoiding borrowing until the economy turns back up, whereas the mid-sized SMEs need more loans to keep their businesses afloat. This explains why NPLs of small SMEs (2.43% of total loans) is surprisingly below those of mid-sized SMEs (2.87% of total loans)
Maintain as top Buy, underpinned by its outstanding loan and non-NII growth plus a lower cost to income ratio after completion of the IT upgrade next year, solidifying L-T value. Note that target price is under review for a roll over to mid-2015.