KBANK: Growth acceleration, but opex higher - Hold (Target Bt123.00)

KBANK: Growth acceleration, but opex higher - Hold (Target Bt123.00)


Event: 3Q10F earnings preview and outlook

Key highlights

Expected 3Q10F at Bt5bn (+5% QoQ and +34% YoY)

Amidst loan growth and margin recovery, the slow Q-o-Q growth will come from lower bancassurance and acceleration of opex. Meanwhile, the strong Y-o-Y growth comes from both NII (+23%) and non-NII growth (+24%).

Loan growth acceleration in 3Q10 and beyond 4Q10

Although 8M10 loan growth at 4.8% is only half of its FY-10 target of 7-9%, signs of loan drawdown from the corporate and SME segments keep its FY-10 target valid. This guidance means MoM loan growth of 1% for the rest of this year, indicating strong NII growth momentum going forward.

….but cost overrun for K-transformation

However, the K-transformation capex budget for improving the core banking system has been significantly revised up by 25-30% from the original budget of Bt15bn, with the project’s completion to be delayed by 6-12 months to 2013F due to the complexity and longer test run. Assuming that the additional costs are capitalized with 10-yr amortization, this should incur additional expenses of around Bt600-700mn p.a. (or at 3% of net earnings) and keep the cost-to-income ratio high at 55% until 2012 (vs. 50% avg. at 3 big banks).


Hold with TP-12M of Bt123 (PBV of 2.0X)

In order to offset the cost overrun, we believe that KBANK will need to lower credit cost by around 5bps (from 70bps to 65bps). Lowering provision expenses to that level makes sense given its continued low NPL inflow, lowest NPL ratio at 3.5% and high coverage of 104%. Incorporating 3Q10F, 9M10 makes up 80% of our FY-10 forecast. With limited upside target price, we downgrade recommendation from buy to hold.