1
Third Quarter 2006 Vol.2 No.4
At a glance From CIRO
Dear KBank investors and analysts, KBank Interest rates Deposits (%) Effective Date Our third quarter results were in line with expectations, and our nine month year to date Savings 0.75 4 Jul 03 performance was satisfactory. NIM remained well above industry average at 4.10%. Loan growth Fixed-3m 3.50-4.25 1 Aug 06 accelerated to 4.4% year to date, driven by the high growth SME portfolio. Fee income grew by Fixed-6m 3.75-4.50 1 Aug 06 16% YoY due largely to the Channel Expansion project initiated at the beginning of this year. NPLs Fixed-12m 4.00-5.00 1 Aug 06 continued to be closely monitored and managed. Total NPLs dropped to 8.11% in 3Q06. Fixed-24m 4.75 12 Apr 06 For 2006, our loan growth target remains around 6-9%, and will continue to be driven Fixed-36m 4.75 12 Apr 06 by the SME segment in 4Q06 as we further penetrate this untapped and underserved market. Our Lending (%) Effective Date NIM for 2006 will likely be at 3.9-4%, with fee in come growth between 15-20% YoY. Provisioning MLR 7.75 1 Aug 06 expense at the Bank only level will be at Bt1.5bn+ in 4Q06. Operating expenses will increase in MOR 8.00 1 Aug 06 4Q06 due to two major investment projects – Channel Expansion and K-Transformation – bringing MRR 8.25 1 Aug 06 the cost to income ratio for 2006 into the 50-52% range. Max rate MRR+5.00 1 Aug 06 With respect to regulatory updates, we expect no further impact from the assets sold to Note: Interest rates above are for domestic retail customers the Thai Asset Management Corporation (TAMC) since 2000, in which gain/loss sharing is KBank NPL scheduled for 2006 and 2011. We will also sell about Bt4.4bn of NPAs to Bangkok Asset Bank Consol Management (BAM) for which we also expect no financial impact. In exchange, BAM will give us
Bt bn % Bt bn % zero-coupon bonds with maturity between 2-9 years. The sales of NPLs to BAM are also under 3Q05 47.9 7.81 59.9 9.65 review and will take place in 2007. As for the IAS39 which will require banks to comply with more 4Q05 44.4 7.08 56.2 8.88 stringent guidelines on provisioning for NPLs, we are now in the process of assessing the impact 1Q06 42.9 6.89 54.8 8.73 and expect no substantial impact under our internal general and specific provisioning regime. 2Q06 42.5 6.70 54.0 8.45 Heading into 2007, we will continue to build quality assets and better capture fee- 3Q06 42.5 6.52 53.3 8.11 based income with continued progress in our strategic investment projects. Our loan growth target is set between 8-13%, fee income growth is expected to be above 20% and the NPL ratio is Industry (14 Thai banks) expected to fall to 5%+. Cost to income ratio will rise next year to 55%+ as investments and HR Sep-06 (Bt bn) Chg(%) upgrades progress. NIM is projected to be within the range of 3.8-3.9%. Bank-only YoY MoM In order to achieve long-term sustainable profitability, we will continue to emphasize Net Loans 4,804 8.67 0.53 brand building with the goal of serving the complete financial needs of our customers within the four Assets 7,482 11.32 0.94 product domains under the KASIKORNBANKGROUP brand. We believe that our focused Deposits 6,064 10.08 1.02 strategies and HR and IT enhancement through the K-Transformation project will help ensure long- Equity 675.0 term competitiveness in the industry. NPL (amt) 463.9 In November we held our annual non-deal roadshow and analyst meeting to give a NPL (%) 8.90 briefing on our 2006 performance and the outlook for 2007. The full version of the presentation LDR (%) 79.22 may be downloaded from www.kasikornbank.com/investor_relations. If you have further queries, Source: Bank of Thailand, KBank please send an email to our mailbox.
KBank Price Performance Best regards, Close 25/07/06 Adit Laixuthai, Ph.D. SET Index 732.80 First Senior Vice President & Chief Investor Relations Officer Bank Sector Index 283.57 Corporate Secretariat Division KBANK (L) 71.5 3 Months 17.21 6 Months 8.33 KBank IR Consensus Survey 1 Year 22.22 KBANK (F) 76.0 The Investor Relations Unit has conducted the 3Q06 consensus survey among analysts to 3 Months 21.60 document their opinions, recommendations and earnings estimates for KASIKORNBANK PCL 6 Months 10.14 (KBank), and to get their general views on the Thai banking industry. Both telephone interviews 1 Year 24.59 and research reports provided the sources of information for our consensus survey conducted Oct KBank Mkt. Cap. (Bt bn) 148 2 - 6, 2006. The total number of analysts that currently cover KBank shares is 43 from 41 securities Note: Outstanding shares = 2,382,147,733 as of Oct 17, brokerage companies, both local and foreign. 2006. Source: KBank 3Q06 Earnings Forecasts KBank Price Performance (3Q06) No. of Analyst
Mn shares Bt/shr 16 25.0 80 14 20.0 70 12 15.0 10 60 10.0 8 50 5.0 6
- 40 4 1 Jul 06 25 Oct 06 2 Volume (L) Volume (F) KBANK (L) KBANK (F) - 2,700-2,900 2,901-3,100 3,101-3,300 3,301-3,500 3,501-3,700 Source: Bloomberg
N=30 Mean = 3,089 Std. Dev. = 205
Note: KBank’s 3Q06 actual profit was Bt3,076mn. 1 2
KBank IR Quarterly Review
KBank Financial Summary (Consolidated) 3Q06 Balance Sheet 3Q06 2Q06 QoQ 3Q05 YoY Performance (%) 3Q05 4Q05 1Q06 2Q06 3Q06 (Bt mn) (Bt mn) %Chg (Bt mn) %Chg ROA 1.70 1.27 1.67 1.63 1.40 ROE 19.23 13.83 18.07 17.25 14.69 Cash 14,646 14,372 1.9 13,039 12.3 Interest spread 3.73 3.99 3.96 4.10 3.89 Interbank & Money Market Items 82,356 82,750 (0.5) 84,088 (2.1) NIM 3.79 4.08 4.07 4.26 4.07 Sec under resale agreement 30,560 1,000 2,956.0 9,360 226.5 Cost-to-Income Ratio 50.18 55.72 47.41 49.07 52.04 Investments -net 101,305 81,678 24.0 96,851 4.6 Note: ROA, ROE and NIM are calculated using QoQ averages of total assets, total Loans & AIR 655,981 636,622 3.0 616,205 6.5 shareholders’ equities and total earning assets, respectively, as denominators. Total Reserves 36,263 36,115 0.4 38,449 (5.7)
Loans & AIR - net 619,718 600,506 3.2 577,756 7.3 Asset Quality & Properties foreclosed - net 16,769 17,208 (2.6) 17,960 (6.6) CAR (%) 3Q05 4Q05 1Q06 2Q06 3Q06 Premises & equipment 22,087 21,600 2.3 21,388 3.3 Asset Quality (%) Other assets 21,018 25,454 (17.4) 19,480 7.9 Total reserve / Loans 6.2 6.0 5.9 5.7 5.5 Total Assets 908,459 844,568 7.6 839,923 8.2 Total reserve / NPL 64.2 66.6 67.5 66.8 68.0 Deposits 730,209 687,164 6.3 702,378 4.0 CAR (%) Interbank & Money Market items 25,494 22,619 12.7 25,573 (0.3) Tier I 9.58 9.53 9.94 10.47 11.17 Borrowings 47,216 33,543 40.8 20,655 128.6 Tier II 4.93 4.93 5.12 5.03 4.92 Other liabilities 20,495 18,813 8.9 15,251 34.4 CAR 14.51 14.47 15.07 15.51 16.09
Total Liabilities 823,414 762,139 8.0 763,857 7.8 ∗ If 3Q06 net profits were included, the tier-1 and total capital funds would be 11.65%, Fully paid-up share capital 23,819 23,816 0.0 23,725 0.4 16.57% respectively. Premium on share capital 17,900 17,894 0.0 17,724 1.0
Premium on expired warrants Deposit Structure (%) 3Q05 4Q05 1Q06 2Q06 3Q06 Appraisal surplus 9,918 9,953 (0.4) 10,060 (1.4) Current 6.00 5.75 5.82 5.59 5.19 Revaluation surplus on investments 84 (638) 113.1 (207) 140.6 Savings 57.45 56.50 52.38 49.34 44.11 Legal reserve 1,470 1,470 0.0 770 90.9 Term-Less than 6 months 27.52 27.55 28.57 26.55 24.02 Other reserves - - - Term-6 months - 1 year 1.74 2.52 5.70 10.54 16.48 Retained earnings (deficit) 31,853 29,933 6.4 23,683 34.5 Term-1 year - over 1 year 7.29 7.68 7.53 7.98 10.19 Total Shareholders' Equity 85,044 82,428 3.2 76,066 11.8 Total 100 100 100 100 100 Liab & Shareholders' Equity 908,459 844,568 7.6 839,923 8.2
Income Statement 3Q06 2Q06 QoQ 3Q05 YoY AMC Progress (%) 3Q05 4Q05 1Q06 2Q06 3Q06 (Bt mn) (Bt mn) %Chg (Bt mn) %Chg PhethaiAMC (Principal balance: Bt74bn **) Portfolio Resolved (%) 76 ** 79 ** 82 ** 83 ** 85 ** Interest & dividend income 13,144 12,838 2.4 9,412 39.7 Recovery Rate (%) * 52 ** 52 ** 51 ** 51 ** 50 **
Interest expenses 4,632 4,050 14.4 1,740 166.3 * Recovery rate = Present value of future cash flow Net income from interest & dividend 8,513 8,789 (3.1) 7,673 10.9 Principal balance ** In March 2005, Ploy AMC sold the entire asset to the Bank and Phethai AMC. Non-interest income 3,740 3,359 11.4 3,256 14.9 Non-interest expenses 6,377 5,961 7.0 5,484 16.3 Pre-provision profit 5,876 6,186 (5.0) 5,444 7.9 Provision expenses (reversal) 1,458 1,314 10.9 1,258 15.9 Income before income tax 4,418 4,872 (9.3) 4,186 5.6 Income tax expense 1,343 1,327 1.2 589 127.8
Net income 3,076 3,545 (13.2) 3,578 (14.0) EPS 1.29 1.49 (13.2) 1.5 (14.4) 3Q06 Performance: Due to the higher interest rate environment, both on lending and deposits, interest expenses Non-Interest Income 3Q06 2Q06 QoQ 3Q05 YoY started to rise slightly faster than income received due to the lag (Bt mn (Bt mn) %Chg (Bt mn) %Chg effect on maturity and repricing of fixed deposits. Thus, our net Gain on investments 69 61 13.4 47 48.8 interest margin (NIM) contracted by 19bps to 4.07% in 3Q06 from Gain (Loss) on transfer of financial assets 0 0004.26% in 2Q06. Non-interest income increased from the previous Share of profit (loss) from invt on equity method 73 44 66.6 28 161.6 quarter, however non-interest expenses increased much faster, Fees and service income 2,739 2,536 8.0 2,363 15.9 reflecting a pattern of expenses that is likely to grow toward the Domestic Banking n.a. n.a. 72% second half of the year with the addition of expenses related to International Banking n.a. n.a. 8% the Bank’s strategic projects. Loan loss provision expenses were Credit card n.a. n.a. 20% also higher in 3Q06. As a result, net income dropped QoQ and the Gain on exchanges 552 410 34.8 392 40.8 cost-to-income ratio edged up to 52.0% in 3Q06 from 49.1% in Other income 307 308 (0.5) 426 (27.9) 2Q06. Total non-interest income 3,740 3,359 11.4 3,256 14.9
Non-Interest Expenses 3Q06 2Q06 QoQ 3Q05 YoY NPL Movement: NPLs in 3Q06 dropped by 18 bps QoQ (Bt mn) (Bt mn) %Chg (Bt mn) %Chg from 6.70% to 6.52% on the Bank Only basis, and by 34 bps QoQ Personnel expenses 2,070 1,819 13.8 2,375 (12.8) from 8.45% to 8.11% on the consolidated basis. The NPL Premises and equipment expenses 1,308 1,306 0.1 1,056 23.8 decrease was mainly from write-offs and debt restructuring. Taxes and duties 559 550 1.6 406 37.6 Coverage ratio was at 68%. Fees and service expenses 705 764 (7.8) 515 36.8 23 36 (36.0) 14 67.6 Directors' remuneration Loss on impairment of properties foreclosed 0 00
Contributions to FIDF 689 695 (0.9) 701 (1.7) Other expenses 1,024 792 29.3 417 145.2 Total non-interest expenses 6,377 5,961 7.0 5,484 16.3
2 3 KBank IR Quarterly Review
3Q06 Performance Based on Consolidated Financial Statements
Interest Income Higher interest income from loans contributed to higher interest income.
• Interest income on loans amounted to Bt10.9bn, an increase of 5.1% QoQ, as a result of loan growth, together with rising interest rates. Lending rates were up by 25bps in 3Q06, to stand at 7.75% for MLR. MLR has been increasing by 125bps from 6.50% in Dec 05 to 7.75% in Aug 06.
Interest Expense
Higher expenses from fixed deposits led to an increase in interest expense.
• Interest expenses on deposits increased by Bt501mn, or 14.5% QoQ, due to an increase in fixed deposit rates. Fixed deposit rates increased by at least 100bps, from 2.00% -3.75% in Dec 05 to 3.50% -4.75% in Sep 06. The Bank has also started to offer a special flexible 8-month fixed deposit account with an interest rate of 5 percent, p.a., paid monthly to depositors. This new deposit campaign ran for 1 month during Aug to Sep 06.
Bad Debt and Doubtful Accounts or Loan Loss Reserves (LLR)
LLRs have increased since the new provisioning scheme (General and Specific Provisions) was put in place starting in 3Q05.
• In 3Q06, the Bank set aside an additional reserve of Bt1,450mn, based on bank only, and Bt1,458mn, based on consolidated basis. This was slightly higher than the reserve set aside in 2Q06, due to the higher amount of new loans extended during 3Q06. In 2Q06, the reserve amount was Bt1,290mn and Bt1,314mn, respectively.
Non-interest Income Higher fee and service income and gain on exchange contributed to higher non-interest income.
• Fee and service income increased by Bt204mn or 8.0% QoQ, mainly from higher fees received from bancassurance, merchant fees on credit cards, and loan related fees such as letters of guarantee. • Gain on exchange increased by Bt142mn or 34.8%, due mostly to gains resulting from changes in fair values using the mark-to-market approach on normal hedging transactions for the Bank’s customers, including forward exchange contracts, cross currency swaps, and interest rate swaps.
Non-interest Expense
Higher personnel expenses and other expenses were the main factors in the increase in non-interest expenses.
• Personnel expenses increased by Bt252mn or 13.8%, mainly from a higher provision for employee bonuses. The Bank set aside a higher provision amount for bonuses in the second-half as compared to the first-half of the year. • Other expenses increased by Bt232mn or 29.3%, due mainly to higher expenses on the Bank’s strategic projects and loss on impairment of foreclosed properties.
Summary:
Due to the higher interest rate environment, both on lending and deposits, interest expenses started to rise slightly faster than income received due to a lag effect on maturity and repricing of fixed deposits. Thus, our net interest margin (NIM) contracted by 19bps to 4.07% in 3Q06 from 4.26% in 2Q06. Non-interest income increased from the previous quarter, however non-interest expenses increased much faster, reflecting a pattern of expenses that is likely to grow toward the second half of the year, with the addition of expenses related to the Bank’s strategic projects. Loan loss provision expenses were also higher in 3Q06. As a result, net income dropped QoQ and the cost-to-income ratio edged up to 52.0% in 3Q06 from 49.1% in 2Q06.
3 4 KBank IR Quarterly Review
Hot Stuffs
K-Transformation and Channel Expansion Projects
Comprehensive K-Transformation NPLs Balanced 8-Strategic Re-engineering Resolution Scorecard Program KASIKORNBANKGROUP Channel Expansion Strategy
199419952001 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
8-Strategic Program 1. Customer Relationship Management Please refer to the details below for an update of the projects 2. Credit Transformation 3. Fee-based Business K-Transformation and Channel Expansion 4. E-Approach Development 1. Know Our Customer (KOC) 5. Centralized Back Office Reconfiguration 2. Multi-channel Sales and Services (MSS) 6. Value-based Management 3. IT Capital (ITC) 7. Human Resource Management 4. Channel Expansion (CE) 8. Core Banking Replacement Postponed to 2006
Benefit, Progress and Action Plans on K-Transformation & Channel Expansion
Know Our Customer Multi-channel Sales and IT Capital Channel Expansion (CE) (KOC) Services (MSS) (ITC) Benefit - Increase ability to formulate - Enhance multi-channel - Reduce overall time-to- - Convenience and strategies sales and service capability market accessibility - Innovative campaigns and - Drive revenue growth - System and information - Revenue enhancement product offerings - Reduce cost and efficiently access anywhere, anytime - Maximize customer value manage customer - One single customer and drive profitability relationships depository date (KGroup) - Increase customer - New integrated satisfaction management system Progress and Action Plans Year 2006 Completed - Launched five pilot - New MSS business model - Chart of account redesign campaigns through basic development & key process - Detailed gap assessment customer information design with Core Banking system - Expand 80 branches in analysis - MSS vendor selected vendor middle income life style area In progress - Evaluating key tools to - Gap analysis and inception - 1st release of core General - Increase 1,160 ATM in high enable the analysis of data, with MSS vendor Ledger system traffic locations and campaign development and - Full alignment of plans and community areas campaign management activities for all initiatives within KT Year 2007 - Analytical tool - Call Center System - General Ledger System - Expand 37 new branches implementation Development development and and 600 additional ATMs - Campaign Management - Internet Banking System implementation Tool pilot rollout Development Year 2008 - Full implementation - Mulit-channel Sales & - Core Banking System pilot - Continue to enhance Service System Development rollout revenue from strong branch (Full implementation in 2009) and ATM network
4 5
KBank IR Quarterly Review
What’s up?
KASIKORNBANKGROUP (KASIKORNBANKGROUP.COM)
Nov 06 • KBank arranged an Analyst and Fund Manager Meeting with Dr. Prasarn Trairatvorakul, President, speaking on the Bank’s performance this year, as well as the economy and the Bank’s performance for the coming year. Oct 06 • Mr. Banthoon Lamsam, CEO, participated in a seminar entitled “Thailand and Yunnan: Gateway to China-ASEAN Economic Cooperation”, co-organized by KBank and China’s National Development Research Institute. The seminar took place in Kunming, China, and was designed to promote KBank and its subsidiaries as well as invite Chinese investors to develop businesses in Thailand. • KGroup participated in Money Expo Chiangmai. At the exhibition, KBank and its subsidiaries offered exclusive promotions and free gifts to both retail and SME customers. • KSecurities arranged a seminar entitled “Entrust your Money Management to KSecurities” as part of the company’s effort to promote efficient ways for Private Wealth Management to 60 KGroup customers and new investors. Sept 06 • KBank participated in the 15th Housing & Condo Expo at the Queen Sirikit National Convention Center. At the exhibition, KBank offered special housing promotions to customers who purchased properties from KBank partners, who had about 45 projects at the event. • KLeasing recently introduced a new product, “K-Car for Cash”, that allows customers to use their cars as loan collateral. A total of Bt200mn in loans is expected by the end of this year. KLeasing also plans to offer an Operating Lease service for executive and company cars, which it will start with service to the subsidiaries of KBank.
Corporate Business August 06 • The Bank has developed “K-Supply Chain Financing” to support supply chain businesses. This product will increase financial capacity, raise working capital and save costs for the operation of Dealer, Sponsor and Supplier. The Bank target for this product is Bt10bn in loans in one year.
Retail Business
Nov 06 • The Bank relaunches “K-Express Cash”, a new personal loan product offering loans without collateral. Personal customers must have a monthly income over Bt15,000 and have worked for more than six months. Entrepreneurs must have a monthly income of at least Bt20,000 and have been established in business for one year. The maximum credit line is three times monthly income or Bt1.5mn, whichever is lower. Oct 06 • The Bank opened Suvarnabhumi Airport Sub-branch, the 539th branch, plus the KBank Suvarnabhumi Airport foreign exchange booth located at the Bus Terminal of the airport. • The Bank plans to expand business in Samui Island, which currently has four branches, 35 ATMs and five foreign exchange booths. The Bank will open two more foreign exchange booths and two more branches in order to increase KBank’s market share in Samui Island, especially from property businesses. • Bangkok Airways signed an agreement with KBank for the use of K-Payment Gateway, which offers online payment service for E-Ticketing through Visa and Master Card. Currently, around 400 companies have used K-Payment Gateway and KBank forecasts a higher number of customers using this service in the future.
SME
August 06 • The Bank developed a new lending process called “K-SME approved in three days”. Entrepreneurs with an annual sales turnover of less than Bt50mn can apply for SME credit with a maximum credit line of Bt10mn per customer. This product will help them develop their financial plan and manage business more efficiently. • The Bank developed a new loan product, “K-Trade Plus”, for SME businesses. This loan does not require collateral but a personal or corporate guarantee is still requested. Targeted customers for K-Trade Plus are SMEs with an annual sale turnover of Bt30-400mn and at least two years of established business. The credit line will vary depend on business growth projection.
Corporate Recognition Nov 06
• Honored as Thailand’s second Strongest Bank and the Asian Pacific’s 137th Strongest Bank by the Asian Banker annual ranking of Asia Pacific’s top
300 commercial banks.
• Received an “Excellent” rating in Corporate Governance of Thai listed Companies 2006 from Thai Institute of Directors Association. Oct 06 • Received the “Bank of the Year 2006” award from Money and Banking Magazine, along with SCB. Sept 06 • Received the “Financial Management Excellence” award in the 5th Thailand Corporate Excellence Awards hosted by the Thailand Management Association and the Graduate Institute of Business Administration of Chulalongkorn University.
5 6 KBank IR Quarterly Review
Updates
KASIKORNBANKGROUP: Performance and Target Source: KAsset, KLeasing, KFactoring, KSecurities, and KResearch
KFactoring KAsset KResearch KSecurities KLeasing EST. 1990 EST. 1992 EST. 1995 EST. July 2005 EST. August 2005
Company profile Factoring service Fund management Research house for staff Financial solution and Hire purchase & customers of KGroup service - Domestic - Mutual fund Finance lease and general public with – Investment banking - International - Provident fund Floor plan topics in Economics, and underwriting Equipment lease - Private fund Business and Money&Banking – Securities brokerage Asset size (3Q06) Bt4.55bn Bt1.31bn Bt23.68mn Bt0.92bn Bt9.11bn Net income/loss (9M06) Bt58.62mn Bt247.16mnBt2.13mn Bt(62.36)mn Bt(179.29)mn Outstanding loans (Bt4.4bn) Asset Under Management Trading volume Outstanding loans(Bt9.1bn) Highlight (3Q06) n.a. with 54.1% growth (Bt240.3bn) with 11.2% (Bt28.4bn) 218.5% Loan growth growth Factoring Business Volume (Bt16.7bn)
Market share (3Q06) 21.0% (Ranked no.1) 15.7% (Ranked no.1) n.a. 0.5% n.a.