High conviction: KTB – Largest NIM expansion, attractive valuation

We expect KTB to have the largest NIM expansion with stable asset quality in 2023. In 2H23, we expect accelerated loan growth, continued NIM expansion, with stable credit cost and a seasonal rise in opex. We keep KTB as one of the sector’s top picks with an unchanged TP of Bt25 on the back of 1) a cheap valuation,2) lower asset quality risk than peers and 3) the largest NIM expansion.

Catalysts.

• Stable asset quality. KTB’s asset quality has been stable so far this year and it expects this to lead to HoH stable credit cost in 2H23. We maintain our 2023F credit cost at 1.25% (+32 bps) vs. 1.23% in 1H23. The rise in credit cost in 2023 is due to its shift in loan mix toward high-yield loans. The bank has lower asset quality risk than peers due to its high exposure to low-risk government loans and personal loans extended to government officials and those whose companies use KTB for payroll. It aims to maintain LLR coverage at higher than 170% vs. 171% at 2Q23.
• Largest 2023F NIM expansion. Thanks to interest rate hikes and a shift in loan mix, KTB had the largest QoQ NIM expansion of 35 bps in 1Q23 and 24 bps in 2Q23 to 3.2%. It expects a further rise in NIM in 3Q23 as a result of interest rate hikes in June and a 25 bps hike in policy rate in August. There is upside to NIM from a further rise in interest rates and another 25 bps hike in policy rate to 2.5%. We expect NIM to rise 61 bps in 2023, the most of peers.
• Accelerating loan growth in 2H23. KTB expects 2023 loan growth (excluding government loans) at ~3%, the lower bound of its 3-5% target. It expects an acceleration in loan growth in 2H23 after -0.6% YTD in 1H23. We forecast loan growth at 2% in 2023 vs. -1% in 2022.

Implications. In 2H23, we expect loan growth to accelerate, NIM to continue to expand, with stable credit cost and seasonal rise in opex. We forecast 3Q23F earnings growth of 22% YoY (higher NII) and 2% QoQ (higher NII, higher ECL, higher opex). In 2023, we expect 22% earnings growth supported by 2% loan growth, a 61 bps rise in NIM, flat non-NII and a 32 bps rise in credit cost.

Action & recommendation. We keep KTB as one of the sector’s top picks with an unchanged TP of Bt25 (0.8x PBV or 8.2x 2024F PE) on the back of 1) a cheap valuation at 0.6x PBV relative to 10% ROE and 6.3x PE for 2024, 2) lower asset quality risk than peers and 3) the largest NIM expansion.

Key risks: 1) Asset quality risk from a global economic slowdown and uneven economic recovery, 2) slower loan growth on low demand and high competition and 3) pressure on non-NII from a volatile capital market and the potential for tighter regulations by the BoT.