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Kiatnakin Bank Target Price: THB58.00 Price: THB51.30 Superior Growth and Dividends Market Cap: USD1,254M Bloomberg Ticker: KKP TB

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Kiatnakin Bank Target Price: THB58.00 Price: THB51.30 Superior Growth and Dividends Market Cap: USD1,254M Bloomberg Ticker: KKP TB Reinitiating Coverage Thailand 2 September 2016 Financial Services | Banks Buy (from Neutral) Kiatnakin Bank Target Price: THB58.00 Price: THB51.30 Superior Growth And Dividends Market Cap: USD1,254m Bloomberg Ticker: KKP TB Reinitiate coverage on KKP with a BUY rating and TP of THB58.00 (13% Share Data upside). We project continued strong earnings growth recovery and a Avg. Daily Turnover (THB/USD) 175m/5.01m healthier balance sheet on: 52-wk Price low/high (THB) 30.3 - 52.5 1. Improved quality of auto HP loans and higher LLC ratio, which will Free Float (%) 76 reduce future credit costs; Shares outstanding (m) 847 2. Loan growth rebound from higher corporate and SME loans; Estimated Return 13% 3. Sustainable high NIM from good control of funding costs. Our GGM-based TP implies FY17F P/BV of 1.1x and P/E of 10.1x. Shareholders (%) Credit Suisse AG, Hong Kong 8.5 Growth and dividend stock. We reinitiate coverage on Kiatnakin Bank (KKP) with a BUY call to reflect: Chase Nominees 7.4 Thai NVDR 6.0 i. Projected strong earnings 16% CAGR for 2016F-2018F, more than double the 7% average for Thai banks under our coverage (TH banks); Share Performance (%) ii. Higher ROEs of 11.7-11.9% for 2016F-2018F; YTD 1m 3m 6m 12m iii. Improved asset quality with lower non-performing loans (NPLs) and higher Absolute 41.4 (2.4) 25.8 13.9 56.5 loan loss coverage (LLC) ratio; Relative 21.5 (3.7) 16.5 (2.0) 43.5 iv. Superior 2016-2018 dividend yields (5.8-6.6%), highest among TH Banks. Source: Bloomberg Interim dividend ex-date on 6 Sep. KKP announced an interim dividend of Kiatnakin Bank (KKP TB) THB2.00/share (ex-date 6 Sep 2016, payment 23 Sep 2016), giving yield of 4%. Price Close Relative to Stock Exchange of Thailand Index (RHS) 58 158 To outperform on strong growth and higher ROEs. KKP’s share price has 53 146 outperformed by 38% YTD from Dec 2015 vs +20% for TH Banks. We believe 48 135 43 123 continued outperformance is warranted given strong projected earnings growth, 38 111 33 100 28 88 higher ROEs, and leading dividend yields among TH banks. 14 12 Earnings to sustain higher ROEs. The bank is expected to outperform in 10 terms of earnings growth (+38% YoY in 2016F vs +3% for the sector) on: 8 6 i. Higher loan growth from corporate and SME loans; 4 2 ii. Lower credit costs on resilient asset quality; Vol m Jul-16 Oct-15 Mar-16 Dec-15 Aug-15 iii. Higher fee income from securities and financial advisory businesses. May-16 Strong earnings growth will lift ROEs to 11.7-11.9% for 2016F-2018F from 8-9% Source: Bloomberg in 2014-2015. Resilient asset quality. KKP is guiding for a fall in NPL ratio to 5.1-5.3% (2015: 5.8%) on continued declines in auto hire purchase (HP) NPLs. Its Table Of Contents balance sheet continues to improve on higher LLC ratio. Actual provisions were Financial Exhibits 2 higher at 169% (2015: 160%) on Bank of Thailand’s (BoT) requirement in 2Q16. Valuations And Recommendation 3 Earnings Outlook 5 This will reduce future credit costs and sustain long term growth – credit costs Company Profile 7 to fall to 135-90bps for 2016F-2018F (peak of 177bps in 2015). Business Overview 9 Industry Overview 18 Risks that could dampen KKP’s fundamentals include: SWOT Analysis 21 i. No significant recovery in consumption spending due to high levels of household debt; ii. Continued declines in local car sales, which will dampen auto HP loans; iii. Persistent pressures on asset quality, which will elevate credit costs. Forecasts and Valuations Dec-14 Dec-15 Dec-16F Dec-17F Dec-18F Reported net profit (THBm) 2,734 3,317 4,571 4,875 5,242 Net profit growth (%) (38.1) 21.3 37.8 6.6 7.5 Recurring net profit (THBm) 2,734 3,317 4,571 4,875 5,242 Recurring EPS (THB) 3.25 3.93 5.40 5.76 6.19 BVPS (THB) 43.5 44.8 47.8 50.5 53.3 DPS (THB) 1.85 3.00 2.97 3.17 3.41 Recurring P/E (x) 15.8 13.1 9.5 8.9 8.3 P/B (x) 1.18 1.14 1.07 1.01 0.96 Dividend Yield (%) 3.6 5.8 5.8 6.2 6.6 Analyst Return on average equity (%) 7.6 8.9 11.7 11.7 11.9 Tanadech Rungsrithananon Return on average assets (%) 1.1 1.4 1.9 2.0 2.1 +66 2862 9745 Our vs consensus EPS (adjusted) (%) (1.0) 2.6 0.0 [email protected] Source: Company data, RHB See important disclosures at the end of this report 1 Powered by the EFA Platform Kiatnakin Bank Thailand Reinitiating Coverage 2 September 2016 Financial Services | Banks Financial Exhibits Financial model updated on: 2016-08-24. Asia Financial summary (THB) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18F Thailand Recurring EPS 3.25 3.93 5.40 5.76 6.19 Financial Services EPS 3.25 3.93 5.40 5.76 6.19 Kiatnakin Bank DPS 1.85 3.00 2.97 3.17 3.41 Bloomberg KKP TB BVPS 43.5 44.8 47.8 50.5 53.3 Buy Valuation metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18F Valuation basis Recurring P/E (x) 15.8 13.1 9.5 8.9 8.3 i. GGM-based valuation based on i) Long term P/B (x) 1.18 1.14 1.07 1.01 0.96 growth of 2.5%, ii) Cost of equity of 10.5%, and Dividend Yield (%) 3.6 5.8 5.8 6.2 6.6 iii) Sustainable ROE of 11.7%. Key drivers Income statement (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18F Interest income 15,929 14,776 14,219 14,703 15,672 i. i) Infrastructure investments that would boost higher loan demand, and ii) Stimulus measures Interest expense (7,016) (5,328) (4,569) (4,789) (5,400) minimise NPL risks and shore up loan demand. Net interest income 8,913 9,449 9,650 9,915 10,271 Non interest income 3,719 5,228 5,804 5,882 6,049 Key risks Total operating income 12,633 14,676 15,454 15,797 16,320 i. i) A slower-than-expected economic recovery Overheads (6,270) (7,441) (7,300) (7,663) (8,036) that may dampen the demand for loans, ii) A Pre-provision operating profit 6,362 7,235 8,153 8,133 8,284 sharper-than-expected NIM compression due to Loan impairment allowances (3,199) (3,208) (2,417) (2,016) (1,706) competition for loans, and iii) A deterioration in loan quality that could pressure higher-than- Pre-tax profit 3,163 4,027 5,736 6,118 6,578 expected provision levels. Taxation (384) (602) (1,119) (1,193) (1,283) Minority interests (45) (108) (46) (49) (53) Company Profile Reported net profit 2,734 3,317 4,571 4,875 5,242 Kiatnakin Bank (KKP) is a commercial bank that Recurring net profit 2,734 3,317 4,571 4,875 5,242 provides a full range of financial services. It is a major player in the auto financing segment, with such loans comprising 65% of its total loans (mostly upcountry). It Profitability ratios Dec-14 Dec-15 Dec-16F Dec-17F Dec-18F also has residential project and corporate loans Return on average assets (%) 1.1 1.4 1.9 2.0 2.1 services. KKP merged with Phatra Financial Group in Return on average equity (%) 7.6 8.9 11.7 11.7 11.9 Sept 2012 under a share-swap deal. Post merger, Return on IEAs (%) 7.1 6.9 6.8 6.8 7.0 Phatra’s management and staff (RPIC) holds a 10.4% Cost of funds (%) 3.7 3.0 2.6 2.6 2.8 stake in KKP, becoming its second-largest shareholder after the Watanavakin family’s 23.6% Net interest spread (%) 3.4 3.9 4.2 4.2 4.2 stake (30.8% previously). Net interest margin (%) 4.0 4.4 4.6 4.6 4.6 Non-interest income / total income (%) 29.4 35.6 37.6 37.2 37.1 Cost to income ratio (%) 49.6 50.7 47.2 48.5 49.2 Credit cost (bps) 171 177 135 110 90 Balance sheet (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18F Total gross loans 184,118 177,681 180,403 186,075 193,103 Other interest earning assets 36,296 30,092 31,226 32,475 33,774 Total gross IEAs 220,414 207,772 211,629 218,551 226,877 Total provisions (8,321) (9,546) (9,965) (9,981) (9,688) Net loans to customers 175,797 168,135 170,438 176,094 183,415 Total net IEAs 212,093 198,227 201,664 208,569 217,189 Total non-IEAs 29,060 37,918 36,842 39,477 40,779 Total assets 241,153 236,144 238,506 248,046 257,968 Customer deposits 132,297 104,327 105,499 108,816 112,925 Other interest-bearing liabilities 52,882 70,683 68,632 78,934 79,248 Total IBLs 185,179 175,010 174,131 187,750 192,173 Total non-IBLs 19,062 22,978 23,697 17,277 20,359 Total liabilities 204,242 197,988 197,828 205,026 212,532 Share capital 8,428 8,468 8,468 8,468 8,468 Other reserves 10,371 10,262 10,716 10,851 10,896 Shareholders' equity 36,682 37,929 40,439 42,769 45,173 Minority interests 229 227 239 251 263 Asset quality and capital Dec-14 Dec-15 Dec-16F Dec-17F Dec-18F Reported NPLs / gross cust loans (%) 5.6 5.9 5.3 4.9 4.6 Total provisions / reported NPLs (%) 80.4 91.7 104.1 109.7 109.8 CET-1 ratio (%) 14.8 14.6 15.4 15.9 16.5 Tier-1 ratio (%) 14.8 14.6 15.4 15.9 16.5 Total capital ratio (%) 15.2 16.5 17.4 17.8 18.3 Source: Company data, RHB See important disclosures at the end of this report 2 Kiatnakin Bank Thailand Reinitiating Coverage 2 September 2016 Financial Services | Banks Valuations And Recommendation BUY with GGM-based TP of THB58.00 We reinitiate coverage on KKP with a BUY rating, on: i.
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