Thailand Company Update

7 November 2019 Financial Services | Krungthai (KTB TB) Neutral (Maintained) More Challenges Ahead, Still NEUTRAL Target Price (Return) THB17.50 (+5%) Price: THB16.70 Market Cap: USD2,024m Avg Daily Turnover (THB/USD) 687m/21.1m

Turnover  Still NEUTRAL with THB17.50 TP from THB18.00, 5% upside plus 5% Analyst (THB/USD) yield, reflecting earnings downgrade. Valuation is relatively undemanding after a 12.5% YTD share price decline (trading at -1.5SD from its historical mean) – we believe it has priced in future uncertainties. However, growth Tanadech Rungsrithananon prospects are expected to be lacklustre in 2020F-2021F, dragged by the +66 2088 9745 slowing economic growth and new regulations. Our TP suggests 0.7x 2020F [email protected]

P/BV and 8.7x P/E.  Loan growth expected lower than 5% target. At the analyst briefing on 6 Nov, given weaker-than-expected SME and mortgage lending, full-year loan growth would likely be lower than the 5% target in 2019 (9M19: 3.4% YTD). It would not record extra interest income of THB4bn from the auction of

mortgaged guarantee assets in 4Q19F, as guided by management in August. Share Performance (%) Instead, it should be recorded in 2020. We note that Krungthai Banlk YTD 1m 3m 6m 12m recorded extra interest income of THB3.9bn in 1Q. Despite the impact from Absolute (12.5) (0.6) (11.6) (11.1) (16.4) the lending rate cuts in August, NIM should be stable QoQ in 4Q given lower Relative deposit costs as high-costs deposits of THB90bn should mature and be (16.5) (1.9) (8.9) (8.0) (13.9) replaced by lower-cost deposits. Moreover, it is likely to record extra 52-wk Price low/high (THB) 15.80-20.60 investment gains to help offset additional impairment losses from properties

foreclosed set aside in 4Q. The bank guided that there should be no PCL (KTB TB) Price Close significant rise in capex related to IT investments in 4Q as its digital 180.0 transformation programme has been slower-than-expected and under review. 160.0 140.0

 No excess provisions are expected to release after the TFRS 9 adoption. 120.0

Management guided that provisions in 4Q would likely be stable QoQ given 100.0 resilient asset quality and adequate reserves. The bank preferred to maintain 80.0 excess reserves to strengthen balance sheets rather than to release them 60.0 after the Thai Financial Reporting Standards 9 (TFRS 9) is implemented in 40.0 Jan 2020. Provisions post-TFRS 9 implementation might be up to 120bps 20.0 (bank only). Moreover, financial statements post-TFRS9 adoption would 0.0 change the way banks record future interest income, fee income, investment

gains, which might affect future business plans. Clearer details would be Source: Bloomberg released in early 2020.

 4Q19F and 2019F outlook. We revise down our earnings projections in 2019

by 8% to THB28bn, down 2% given lower-than-expected NII from the interest rate cuts and no extra interest income to be recorded in 4Q. To reflect this, 4Q19F earnings are expected at THB6.2bn, flat YoY.  Slower growth ahead in 2020F-2021F. We revise down our earnings projections by 6-7% for 2020-2021 largely as we increase credit cost assumptions to 1.2-1.1% (from 1.1-1%) and lower NIM assumptions to 3.34- 3.25% (from 3.29-3.25%) to reflect the impact of interest rate cuts.

Forecasts and Valuation Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Reported net profit (THBm) 22,440 28,491 28,006 28,230 29,433 Recurring net profit (THBm) 22,440 28,491 28,006 28,230 29,433 Recurring net profit growth (30.5) 27.0 (1.7) 0.8 4.3 Recurring(%) EPS (THB) 2.0 2.0 2.0 2.1 2.1 BVPS (THB) 21.9 24.4 25.5 26.7 27.9 DPS (THB) 0.9 0.9 0.9 0.9 0.9 Recurring P/E (x) 9.4 8.3 8.3 7.9 7.9 P/BV (x) 0.9 0.7 0.7 0.6 0.6 Dividend yield (%) 4.5 5.3 5.3 5.5 5.6 Return on average equity (%) 8.0 9.6 8.7 8.1 8.1 Return on average assets (%) 0.8 1.0 1.0 1.0 1.0 Source: Company data, RHB

See important disclosures at the end of this report 1

Krungthai Bank Company Update

7 November 2019 Financial Services | Banks

Financial Exhibits Asia Financial summary Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F

Country EPS (THB) 1.6 2.0 2.0 2.0 2.1

Financials Core EPS (THB) 1.6 2.0 2.0 2.0 2.1

Company Name DPS (THB) 0.6 0.9 0.9 0.9 0.9

Bloomberg KTB TB BVPS (THB) 20.6 21.9 24.4 25.5 26.7

NEUTRAL

Valuation metrics Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F

Valuation basis Recurring P/E (x) 12.0 9.4 8.3 8.3 7.9

Our GGM assumptions include: P/B (x) 0.9 0.9 0.7 0.7 0.6

i. COE of 10.8%; Dividend yield (%) 3.2 4.5 5.3 5.3 5.5 ii. ROE of 8%; iii. Long-term growth of 2%. Balance sheet (THBm) Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F

Gross loans & advances 1,938,082 2,023,938 2,104,896 2,189,092 2,276,656

Key drivers Loan impairment allowances (125,364) (133,488) (143,674) (154,438) (164,000)

i. Infrastructure investments that Net loans & advances 1,817,912 1,895,874 1,967,537 2,041,221 2,119,486

should boost loans demand; Total assets 2,854,210 2,739,203 2,821,379 2,877,807 2,935,363 ii. Stimulus measures should minimise Deposits from customers 2,070,875 2,039,602 2,033,716 2,094,825 2,147,788 NPL risks and shore up loans Total liabilities 2,559,991 2,425,062 2,472,481 2,512,718 2,553,406 demand. Shareholders' funds 287,861 305,875 340,633 356,823 373,691

Total equity 294,219 314,141 348,899 365,089 381,957

Income statement (THBm) Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F

Key risks Net interest income 86,863 83,689 88,933 88,651 89,573

Non-interest income 36,361 33,532 35,958 35,229 36,308 Upside risks: i. Stronger economic recovery that Operating income 123,224 117,221 124,891 123,881 125,881

may increase demand for loans; Overhead expenses (49,483) (53,088) (62,379) (60,261) (61,851) ii. Sharper NIM expansion due to good Pre-provision operating profit 73,741 64,133 62,512 63,620 64,030 funding costs management; Loan impairment allowances (44,833) (26,192) (25,186) (25,764) (24,562) iii. Improved loan quality that could ease provision levels. Other impairment allowances 0 0 0 0 0

Pre-tax profit 28,907 37,941 37,326 37,856 39,469 Downside risks: Reported net profit 22,440 28,491 28,006 28,230 29,433 i. Slower economic recovery that may dampen demand for loans; Recurring net profit 22,440 28,491 28,006 28,230 29,433

ii. Sharper NIM compression due to

competition for loans and deposits; Profitability Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F iii. A deterioration in loan quality that ROA (%) 0.8 1.0 1.0 1.0 1.0 could pressure higher provision levels. ROE (%) 8.0 9.6 8.7 8.1 8.1

Yield on IEAs (%) 4.7 4.5 4.6 4.4 4.3

Cost of funds (%) 1.5 1.5 1.5 1.3 1.2

Company Profile Net interest margin (%) 3.3 3.1 3.3 3.2 3.2

Krungthai Bank (KTB) is Thailand's Non-II / Total income (%) 29.5 28.6 28.8 28.4 28.8

second-largest commercial bank and the CIR (%) 40.2 45.3 49.9 48.6 49.1 largest state-owned bank by asset size. Credit cost (bps) 233.4 132.2 122.0 120.0 110.0 Traditionally a corporate lender, the bank is diversifying into small & medium enterprise PIOP growth (%) (0.4) (13.0) (2.5) 1.8 0.6

(SME) and retail lending. It is also growing Net profit growth (%) (30.5) 27.0 (1.7) 0.8 4.3 its non-II via offerings of remittances

services, cards, bancassurance, and FX Asset quality Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F products. Gross impaired loans/Gross 4.2 4.5 4.5 4.5 4.5 loans (%) Loan loss coverage ratio (%) 121.7 125.8 131.5 134.6 138.8

Gross impaired loans (THBm) 103,020 106,104 109,287 114,751 118,194

Liquidity Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F

Loan growth (%) 1.8 4.4 4.0 4.0 4.0

Customer deposits growth (%) 5.0 (1.5) (0.3) 3.0 2.5

LDR (%) 93.6 99.2 103.5 104.5 106.0

Capital Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F CET1 ratio (%) 13.6 14.4 15.0 15.5 16.0 Tier-1 ratio (%) 13.6 14.4 15.0 15.5 16.0

Total capital ratio (%) 17.5 18.2 18.8 19.2 19.7

Source: Company data, RHB

See important disclosures at the end of this report 2

Krungthai Bank Thailand Company Update

7 November 2019 Financial Services | Banks

Valuation and TP Our GGM-based TP of THB17.50 implies 0.7x FY20F P/BV and 8.7x P/E.

Figure 1: KTB’s GGM valuation Cost of equity (COE) computation: Sustainable ROE (%) 8.0 Risk free rate (%) 2.00 COE (%) 10.8 Equity premium (%) 7.00 Long-term growth (g) 2.00 Beta (x) 1.25 Implied P/BV (x) 0.70 Cost of equity - CAPM (%) 10.8 BVPS – FY20F THB25.52 TP THB17.50 TP (rounded) THB17.50

Source: Company data, RHB

Figure 2: KTB’s SD forward P/BV Figure 3: SET Bank Index’s SD forward P/BV

1.80 2.20 KTB TB / Forward P/BV BANK TB / Forward P/BV 1.60 2.00 +2SD: 1.4x +2SD: 1.8x 1.40 1.80

1.20 +1SD: 1.2x 1.60 +1SD: 1.6x

1.00 Mean: 0.9x 1.40 Mean: 1.3x

0.80 1.20 -1SD: 0.6x -1SD: 1.0x 0.60 1.00

0.40 -2SD: 0.4x 0.80 -2SD: 0.8x

0.20 0.60

Source: Bloomberg, RHB Source: Bloomberg, RHB

Impacts from the interest rate cuts. Given the slower than expected economic growth and changes for the interest rate cuts in the future, this might affect NIM for the bank. If the bank cut the interest rates, these might drag NIM to be lower. We study that every 10 bps decrease in NIM would cause NII to decline 3.1% from our projections of THB88.7bn and net profit to decline 7.2% from our projections of 28.2bn in 2020.

Figure 4: NIM sensitivity analysis -20bps -10bps 2020F +10bps +20bps NIM 3.05% 3.15% 3.25% 3.35% 3.45% Net interest income (THBm) 83,190 85,921 88,651 91,382 94,113 Operating income (THBm) 118,419 121,150 123,881 126,611 129,342 PIOP (THBm) 58,158 60,889 63,620 66,351 69,081 Net profit (THBm) 24,157 26,194 28,230 30,266 32,303 Change (14.4%) (7.2%) 0.0% 7.2% 14.4% EPS (THB) 1.73 1.87 2.02 2.16 2.31 BVS (THB) 25.23 25.38 25.52 25.67 25.81 ROAE 6.8% 7.4% 8.1% 8.5% 9.0% Source: Company data, RHB

Impacts from the credit costs adjustments. Although the bank has high reserves, we conservatively assume it to set aside high provisions to counter potential uncertainties. If the bank sets aside credit costs that are lower than our estimates, these might result in earnings rising higher than our expectations. Our analysis shows that every 10 bps decrease in credit costs would cause net profit to rise 5.7% from our projection of 28.2bn in 2020

See important disclosures at the end of this report 3

Krungthai Bank Thailand Company Update

7 November 2019 Financial Services | Banks

Figure 5: Credit cost’s sensitivity analysis -20bps -10bps 2020F +10bps +20bps Credit costs (bps) 63,620 63,620 63,620 63,620 63,620 Pre-impairment operating profit (THB m) (21,470) (23,617) (25,764) (27,911) (30,058) Provisioning expenses (THB m) 90 bps 100 bps 110 bps 120 bps 130 bps Net profit (THB m) 31,432 29,831 28,230 26,629 25,028 Change 11.3% 5.7% 0.0% (5.7%) (11.3%) EPS (THB) 2.25 2.13 2.02 1.90 1.79 BVS (THB) 25.75 25.64 25.52 25.41 25.29 ROAE 10.0% 9.5% 8.1% 8.5% 8.0% Source: Company data, RHB

Figure 6: KTB’s earnings growth trend Figure 7: KTB’s NPL ratio and LLC ratio trend

80,000 30.0% 5.0% 160% 4.5% 70,000 20.0% 140% 4.0% 60,000 120% 10.0% 3.5% 50,000 3.0% 100% 0.0% 40,000 2.5% 80% (10.0%) 2.0% 30,000 60% (20.0%) 1.5% 20,000 40% 1.0% (30.0%) 10,000 0.5% 20% 0 (40.0%) 0.0% 0% 2014 2015 2016 2017 2018 2019F 2020F 2021F 2014 2015 2016 2017 2018 2019F 2020F 2021F

PIOP (THBm) Provisions (THBm) Credit costs NPL ratio LLC ratio (RHS) Net profit (THBm) Net profit growth (RHS) Source: Company data, RHB Source: Company data, RHB

Figure 8: KTB’s NIM trend Figure 9: KTB’s CIR and ROE trend

7.0% 16% 60%

14% 6.0% 50% 12% 5.0% 40% 10% 4.0% 8% 30% 3.0% 6% 20% 2.0% 4% 1.0% 10% 2% 0.0% 0% 0% 2014 2015 2016 2017 2018 2019F 2020F 2021F 2014 2015 2016 2017 2018 2019F 2020F 2021F

Loan yield Funding cost ROAE (LHS) Cost to income ratio (RHS) NIM NIM after provisions Source: Company data, RHB Source: Company data, RHB

See important disclosures at the end of this report 4

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การจัดอันดับบรรษัทภิบาล 2561 (Thai Institute of Directors Association (IOD) – Corporate Governance Report Rating 2018

ADVANC AKP AMATA AMATAV ANAN AOT AP BAFS BANPU BAY BCP BCPG BRR BTS BWG CFRESH CHO CK CKP CM CNT COL CPF CPI CPN CSL CSS DELTA DEMCO DRT DTAC DTC EA EASTW EGCO GC GEL GFPT GGC GOLD GPSC GRAMMY GUNKUL HANA HMPRO ICC ICHI INTUCH IRPC IVL JSP KBANK KCE KKP KSL KTB KTC LHFG LIT LPN MAKRO MBK MCOT MINT MONO MTC NCL NKI NVD NYT OISHI OTO PCSGH PDJ PG PHOL PLANB PLANET PPS PRG PSH PSL PTG PTT PTTEP PTTGC PYLON Q-CON QH QTC RATCH ROBINS S & J SABINA SAMART SAMTEL SAT SC SCB SCC SCCC SDC SE-ED SIS SITHAI SNC SPALI SPRC SSSC STEC SVI SYNTEC TASCO TCAP THAI THANA THANI THCOM THIP THREL TIP TISCO TKT TMB TNDT TOP TRC TRU TRUE TSC TSTH TTCL TU TVD UAC UV VGI VIH WACOAL WAVE WHA WINNER

2S AAV ACAP AGE AH AHC AIRA AIT AKR ALLA ALT AMA AMANAH APCO AQUA ARIP ARROW ASIA ASIMAR ASK ASN ASP ATP30 AU AUCT AYUD BA BBL BDMS BEC BEM BFIT BGRIM BIZ BJC BJCHI BLA BOL BPP BROOK BTW CBG CEN CENTEL CGH CHEWA CHG CHOW CI CIMBT CNS COM7 COMAN CPALL CSC CSP DCC DCORP DDD EASON ECF ECL EE EPG ERW ETE FN FNS FORTH FPI FSMART FVC GBX GCAP GLOBAL GLOW GULF HARN HPT HTC HYDRO ICN ILINK INET IRC ITD JAS JCKH JKN JWD K KBS KCAR KGI KKC KOOL KTIS L&E LANNA LDC LH LHK LOXLEY LRH LST M MACO MAJOR MALEE MBKET MC MEGA METCO MFC MFEC MK MOONG MSC MTI NCH NEP NINE NOBLE NOK NSI NTV NWR OCC OGC ORI PAP PATO PB PDI PJW PLAT PM PORT PPP PREB PRECHA PRINC PRM PT QLT RICHY RML RS RWI S S11 SALEE SANKO SAWAD SCGS SCI SCN SE SEAFCO SEAOIL SELIC SENA SFP SIAM SINGER SIRI SKE SMK SMPC SMT SNP SORKON SPC SPI SPPT SPVI SR SSF SST STA SUC SUSCO SUTHA SWC SYMC SYNEX TACC TAE TAKUNI TBSP TCC TEAM TFG TFMAMA THRE TICON TIPCO TK TKN TKS TM TMC TMI TMILL TMT TNITY TNL TNP TNR TOA TOG TPA TPAC TPBI TPCORP TRITN TRT TSE TSR TSTE TTA TTW TVI TVO TWP TWPC U UMI UOBKH UP UPF UPOIC UT UWC VNT WHAUP WICE WIIK XO YUASA ZMICO

7UP ABICO ABM AEC AEONTS AF AJ ALUCON AMARIN AMC AS ASAP ASEFA ASIAN BCH BEAUTY BGT BH BIG BLAND BM BR BROCK BSBM BTNC CCET CCP CGD CHARAN CHAYO CITY CMO CMR COLOR CPL CPT CRD CSR CTW CWT D DCON DIGI DIMET EKH EMC EPCO ESSO ESTAR EE FLOYD FOCUS FSS FTE GENCO GIFT GJS GLAND GPI GREEN GTB GYT HTECH IFS IHL III INOX INSURE IRCP IT ITEL J JCK JMART JMT JTS JUBILE KASET KCM KIAT KWC KWG KYE LALIN LEE LPH MATCH MATI MBAX M-CHAI MDX META MILL MJD MM MODERN MPG NC NDR NETBAY NNCL NPK OCEAN PAF PDG PF PICO PIMO PK PL PLE PMTA PPPM PRIN PSTC PTL RCI RCL RJH ROJNA RPC RPH SAMCO SAPPE SCP SF SGF SGP SKN SKR SKY SLP SMIT SOLAR SPA SPCG SPG SQ SRICHA SSC SSP STANLY STPI SUN SUPER SVOA T TCCC TCMC THE THG THMUI TIC TITLE TIW TMD TOPP TPCH TPIPP TPOLY TTI TVT TYCN UEC UMS UNIQ VCOM VBIHA VPO WIN WORK WP WPH ZIGA

Website: www.thai-iod.com IOD (IOD Disclaimer) ผลสํารวจการกํากับดูแลกิจการบริษัทจดทะเบียนที่แสดงไว้นี้ เป็นผลที่ได้จากการสํารวจและประเมินข้อมูลที่บริษัทจดทะเบียนในตลาดหลักทรัพย์แห่งประเทศไทย และ ตลาดหลักทรัพย์ เอ็ม เอ ไอ (“บริษัทจดทะเบียน”) เปิ ดเผยต่อสาธารณะและเป็ นข้อมูลที่ผู้ลงทุนทั่วไปสามารถเข้าถึงได้ ผลสํารวจดังกล่าวจึงเป็นการนําเสอนข้อมูลในมุมมอง ของบุคคลภายนอกต่อมาตรฐานการกํากับดูแลกิจการของบริษัทจดทะเบียน โดยไม่ได้เป็นการประเมินผลการปฏิบัติงานหรือการดําเนินกิจการของบริษัทจดทะเบียนอีกทั้งมิได้ ใช้ข้อมูลภายในของบริษัทจดทะเบียนในการประเมิน ดังนั้นผลสํารวจที่แสดงนี้จึงไม่ได้เป็นการรับรองถึงผลการปฏิบัติงานหรือการดําเนินการของบริษัทจดทะเบียนและไม่ถือ เป็นการให้คําแนะนําในการลงทุนในหลักทรัพย์ของบริษัทจดทะเบียนหรือคําแนะนําใดๆ ผู้ใช้ข้อมูลจึงควรใช้วิจารณญาณของตนเองในการวิเคราะห์และตัดสินใจในการใช้ ข้อมูลใดๆที่เกี่ยวกับบริษัทจดทะเบียนที่แสดงในผลสํารวจนี้ ทั้งนี้บริษัทหลักทรัพย์ อาร์เอชบี (ประเทศไทย) จํากัด (มหาชน) มิได้ยืนยันหรือรับรองถึงความครบถ้วนและถูกต้องของผลสํารวจดังกล่าวแต่อย่างใด

ข ้อมูล Anti-Corruption Progress Indicator 2560 ประกาศเจตนารมณ์ CAC

ได้รับการรับรอง CAC

N/A

Source: Thai Institute of Directors ข้อมูลบริษัทที่เข้าร่วมโครงการแนวร่วมปฏิบัติของภาคเอกชนไทยในการต่อต้านทุจริต (Thai CAC) ของสมาคมส่งเสริมสถาบันกรรมการบริษัทไทย (ข้อมูล ณ วันที่ 17 ต.ค.) • ได้ประกาศเจตนารมณ์เข้าร่วม CAC • ได้รับการรับรอง CAC การเปิดเผยการประเมินดัชนีชี้วัดความคืบหน้าการป้องกันการมีส่วนเกี่ยวข้องกับการทุจริตคอร์รัปชัน (Anti-Corruption Progress Indicators) ของบริษัทจดทะเบียนในตลาดหลักทรัพย์แห่งประเทศไทยที่ จัดทําโดยสถาบันที่เกี่ยวข้องซึ่งมีการเปิดเผยโดยสํานักงานคณะกรรมการกํากับหลักทรัพย์และตลาดหลักทรัพย์นี้เป็นการดําเนินการตามนโยบายและตามแผนพัฒนาความยั่งยืนสําหรับบริษัทจดทะเบียนโดย ผลการประเมินดังกล่าว สถาบันที่เกี่ยวข้องอาศัยข้อมูลที่ได้รับจากบริษัทจดทะเบียนตามที่บริษัทจดทะเบียนได้ระบุในแบบแสดงข้อมูลเพื่อการประเมิน Anti-Corruption ซึ่งอ้างอิงข้อมูลมาจากแบบแสดง รายงานข้อมูลประจําปี แบบ (56-1) รายงานประจําปีแบบ (56-2) หรือในเอกสารหรือรายงานอื่นที่เกี่ยวข้องซึ่งเป็นบุคคลภายนอก โดยมิได้เป็นการประเมินการปฏิบัติของบริษัทจดทะเบียนในตลาดหลักทรัพย์ แห่งประเทศไทยและมิได้ใช้ข้อมูลภายในเพื่อการประเมิน เนื่องจากผลการประเมินดังกล่าวเป็นเพียงผลการประเมิน ณ วันที่ ปรากฏในผลการประเมินเท่านั้น ดังนั้นผลการประเมินจึงอาจเปลี่ยนแปลงได้ ภายหลังวันดังกล่าว หรือรับรองความถูกต้องครบถ้วนของผลประเมินดังกล่าวแต่อย่างใด