Thailand Company Guide Kiatnakin Bank Version 5 | Bloomberg: KKP TB | Reuters: KKP.BK Refer to important disclosures at the end of this report DBS Group Research . Equity 26 Jul 2018 BUY Promising growth prospect Last Traded Price ( 25 Jul 2018): Bt72.50 (SET : 1,690.08) Price Target 12-mth: Bt92.00 (27% upside) (Prev Bt88.00) Thesis. Decent growth, high dividend yield. We like KKP for its continual operating improvements in both its commercial Analyst banking and capital market businesses, thanks to the synergies Thaninee SATIRAREUNGCHAI, CFA +662 857 7837 [email protected] between (previously) KK (commercial banking business) and PHATRA (capital market business). KKP is ready to grow with the economy, given its strong capital structure and recently What’s New developed internal models that allow it to capture new • Loan growth outlook looks promising businesses and new clientele. We expect FY18F dividend yield to continue to be high at 7% p.a., driven by decent earnings • Asset quality continued to improve growth, despite a lower dividend payout. • Dividend payout to decline, but yield likely to remain high Where we differ. Market underestimated growth for KKP. We • Maintain BUY with higher TP of Bt92.00 believe, with KKP’s recently developed internal models, potential growth from its commercial banking and capital market businesses could trump what the market has expected. Price Relative We now expect KKP’s earnings to grow 7.8% in FY18F, driven Bt Relative Index by robust loan growth and ROE expansion. 86.6 211 191 76.6 171 66.6 151 Potential catalysts. Stronger-than-expected fee income from 56.6 131 46.6 111 capital market business. Should capital market conditions 36.6 91 26.6 71 improve, KKP’s operating performance will improve accordingly. Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Kiatnakin Bank (LHS) Relative SET (RHS) Besides, any sizeable (IB) deal could also act as a catalyst for KKP’s share price performance. Forecasts and Valuation FY Dec (Btm) 2016A 2017A 2018F 2019F Pre-prov. Profit 8,803 7,719 9,386 10,323 Valuation: Net Profit 5,547 5,737 6,182 6,564 We maintain BUY on KKP with a new TP of Bt92.00. Our TP is Net Pft (Pre Ex.) 5,547 5,737 6,182 6,564 based on the Gordon Growth Model and implies 1.7x FY18F Net Pft Gth (Pre-ex) (%) 67.2 3.4 7.8 6.2 BV. At the current share price, KKP offers a total potential EPS (Bt) 6.55 6.78 7.30 7.75 EPS Pre Ex. (Bt) 6.55 6.78 7.30 7.75 return of 34% (27% capital gain and 7% dividend yield). EPS Gth Pre Ex (%) 67 4 8 6 Diluted EPS (Bt) 6.55 6.78 7.30 7.75 Key Risks to Our View: PE Pre Ex. (X) 11.1 10.7 9.9 9.4 Too slow an economic recovery could lead to further asset- Net DPS (Bt) 6.02 5.00 5.00 5.00 Div Yield (%) 8.3 6.9 6.9 6.9 quality deterioration, which would then lead to higher-than- ROAE Pre Ex. (%) 14.2 14.1 14.4 14.4 expected credit cost and disappointing earnings. ROAE (%) 14.2 14.1 14.4 14.4 ROA (%) 2.4 2.3 2.2 2.1 At A Glance BV Per Share (Bt) 47.6 48.8 52.6 55.3 Issued Capital (m shrs) 847 P/Book Value (x) 1.5 1.5 1.4 1.3 Mkt. Cap (Btm/US$m) 61,389 / 1,848 Earnings Rev (%): 2 2 Major Shareholders (%) Consensus EPS (Bt): 7.23 7.69 Thai NVDR 9.95 Other Broker Recs: B: 11 S: 4 H: 5 Credit Suisse AG, Hong Kong Branch 8.46 Chase Nominees Limited 6.74 Source of all data on this page: Company, DBSVTH, Bloomberg Finance Free Float (%) 68.68 L.P. 3m Avg. Daily Val (US$m) 8.0 ICB Industry : Financials / Banks ed: CK / sa: CW, TP Company Guide Kiatnakin Bank WHAT’S NEW Promising growth prospect Loan growth outlook looks promising. KKP’s loan portfolio expanded 10.2% YTD in 1H18, hitting the bank’s 10% full- Unlike other banks, KKP’s credit cost in FY18F is likely to be year loan growth target for 2018. higher than in FY17’s because i) there will be provisions set Hire purchase (HP) loans continued to grow (+2.8% YTD), aside for new businesses to be offered in 2018, and ii) special driven mainly by used-car HP and car-quick-cash products. mention loans (SM) declined significantly in 2017 and thus The used-car segment (used cars + car-quick-cash) accounted gave back the provisions previously set, reducing the net for 60% of total HP loans at end-2Q18, up from 58% at end- provisions set in FY17. 1Q18 and 56% at end-2017. Of the total loans, HP 2018 targets maintained. Both capital market and financial accounted for 50%, vs. 54% at end-2017; the proportion market businesses should perform better in FY18. KKP should go down further, given that other loans would grow maintains its targets to grow its loan portfolio by 10% (vs. better than HP. 9% in 2017), but with a lower loan spread, i.e. 4.8-5.0% (vs. Other retail loans grew a strong 24% YTD. These include 5.2% in 2017), as it expects to see more growth from lower- personal loans (+7.8%), micro SME (a.k.a. SME Car 3x) yield loans. Note that there were huge NPL resolutions that (+21.4%), and housing loans (+33.2%). Such growth was had resulted in an extraordinary high yield and high spread in attributed mainly to the bank’s new distribution channel 3Q17. (ADC). Given the better economic outlook and potential IB Real estate development loans (RE) expanded 18% YTD, (investment banking business) deals (that are ready to be thanks mainly to the bank’s strategy to grow its market share completed when the market condition is more favourable) in in the top-tier real estate developer market, instead of lower- the pipeline, its capital market business should also perform tier one. well in 2018. Besides, SAM (special asset management business) is a wild card, as normally, this business performs Corporate loans grew strongly 39% YTD and now constitute well when economy picks up. 10% of the total loans (vs. 8% at end-2017). Previously, corporate loans at KKP were short term and volatile, as they Dividend payout to decline, but yield likely to remain high. came mainly from bridging loans or M&A-related deals. Recall that KKP's high dividend payouts for its FY16 and FY17 However, its new corporate lending now was longer term and performance were part of the bank's capital restructuring more stable. plan, i.e. maintaining Tier 1 ratio at around 13-14%, and that has helped boost its ROE during the past several quarters. Loan growth outlook for all those segments remains Similarly, the payout ratio for FY18 performance will depend promising in 2H18, and we now expect KKP’s loan growth to on potential loan growth (i.e. its need for capital) in FY18- come in at 15% in FY18F. 19F. Given its ROE of 14.5% in 1H18, loan growth of c.15% Asset quality continued to improve. NPL ratio has continued in FY18F, and preferred CAR and Tier 1 ratios at 17% and 13- to decline. It was 4.5% at end-2Q18, declining from 5.0% at 14%, respectively, we believe KKP’s dividend payout will be end-2017 and 5.6% at end-2016. This was thanks mainly to lower than FY17’s, but we expect the absolute amount to be the decline in NPLs from RE. RE-NPL ratio was 17.5% at end- maintained at Bt5.00/share, implying a dividend yield of 7% 2Q18, vs. 21.4% at end-2017.This was thanks also to the p.a. bank’s strategic shift of RE lending towards upper-tier listed Maintain BUY with higher TP of Bt92.00. We raise our FY18F RE developers; however, yields would be lower, in line with earnings by 2% to largely reflect our higher loan growth the reduced risks. assumption of 15% (from 10% previously), lower NIM of The bank targets to further reduce its NPL ratio to below 4.3% (from 4.5%) to reflect a larger mix of low-yield 4.5% by the end of 2018 but has guided for a still high 100- corporate, RE, and mortgage loans, and higher cost-to- 120bps credit cost (including loss from sales of repossessed income ratio of 49% (from 47%) to reflect higher-than- cars but excluding general provision) (vs. 80bps in 2017 and expected cost-to-income ratio in 1H18. Our new TP is based 118bps in 1H18). Management has guided that FY18F credit on the Gordon Growth Model and implies 1.7x FY18F BV. cost should be at the lower-bound of the bank’s guidance, KKP is a high dividend-yield play, with potentially strong and thus 2H18 credit cost should be lower than 1H18’s. growth from both banking and capital market businesses. At the current share price, KKP offers a total potential return of 34% (27% capital gain and 7% dividend yield). Page 2 Company Guide Kiatnakin Bank Margin Trends Bt m 12,000 5.3% 10,000 5.1% CRITICAL DATA POINTS TO WATCH 8,000 4.9% 4.7% Critical Factors 6,000 4.5% FY18F loan spread will depend on loan mix.