With a big miss on ECL, 2Q23 results reflected worsening asset quality, rising credit cost, decent loan growth, better NIM, higher non-NII and easing cost to income ratio. We downgrade our rating to Neutral and cut TP to Bt67 from Bt75 to reflect the worse-than-expected asset quality.
2Q23: Big miss on ECL. 2Q23 net profit was Bt1.41bn (-32% QoQ, -31% YoY), below our forecast by 11% and consensus by 21%. The miss lay mainly in much larger ECL than expected.
Highlights.
- Asset quality: NPLs were worse than expected, up 10% QoQ, mainly corporate and HP loans. Credit cost (including losses on repossessed cars) was much higher than expected, up 61 bps QoQ to 2.92% (+165 bps YoY) with a 12% QoQ fall in losses on sale of repossessed cars and a worse-than-expected 71% jump in ECL. LLR coverage fell to 139% from 150% at 1Q23. We raise our 2023F credit cost by 30 bps to 2.51 (vs. 1.93% in 2022).
- Loan growth: +2.8% QoQ, +17.4% YoY, +5.7% YTD. Loan growth by segment: corporate -1.5% QoQ, +23.9% YoY, +4% YTD; SMEs +1.1% QoQ, +16% YoY, +7.9% QoQ; retail +2.6% QoQ, +16.3% YoY, +5.6% YTD. We maintain our 2023F loan growth at 12%.
- NIM: Better than expected, +18 bps QoQ as a 31 bps QoQ rise in yield on earning assets exceeded a 13 bps QoQ rise in cost of funds. We raise our 2023F NIM by 20 bps to 4.62% (+12 bps).
- Non-NII: Better than expected, +11% QoQ, +14% YoY, on higher net fee income (+9% QoQ, +5% YoY) and FVTPL gain (+96% QoQ, +141% YoY).
- Cost to income ratio: -195 bps QoQ, -371 bps YoY to 37.83%, as a rise in toplines exceeded the rise in opex (+2% QoQ, +10% YoY), excluding the 1Q23 reversal of provisions for revaluation of foreclosed assets.
Cut 2023F earnings on credit cost. We cut 2023F earnings by 7% as we raise our credit cost forecast and now expect 2023 earnings to fall 4%. 1H23 earnings accounted for 48% of our full-year forecast. We expect 3Q23F earnings to recover QoQ (lower ECL) but fall YoY (higher ECL).
Downgrade to Neutral with TP cut. We downgrade our rating to Neutral and cut TP to Bt67 (0.85 x 2024F BVPS) from Bt75 to reflect the worse asset quality than expected and a potential conversion of KKP-W5 and KKP-W6.
Key risks: 1) Asset quality risk from global economic slowdown, 2) slower-than-expected loan growth from sluggish loan demand and high competition and 3) non-NII under pressure by a volatile capital market and potential tightening of regulations by the BoT.
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