We see upside risk to NIM as there may be no policy rate cut this year and to credit cost from its de-risked loan portfolio, with a potential hike in dividend payout ratio. We thus keep our rating at Outperform with an unchanged TP of Bt22, backed by: 1) cheap valuation with good dividend yield, 2) lower asset quality risk than peers and 3) continuing earnings recovery as credit cost eases.
Catalysts.
· NIM upside, despite a cut in lending interest rates for vulnerable clients. We see a 3-5 bps upside risk to 2024F NIM from the chance that policy rate will not be cut this year, as suggested by the MPC’s latest minutes, as we factored a 50 bps cut in policy rate and lending interest rates (MLR, MOR, MRR) into our 2024F NIM of 3.12% (-10 bps). KTB will cut lending interest rates (MLR, MOR, MRR) by 25 bps for six months (May 16 to Nov 15) for 300,000 accounts held by those in “vulnerable groups”, equivalent to loans of Bt200bn (8% of total loans). It was the only bank that saw a QoQ fall (-3 bps QoQ) in cost of funds in 1Q24 on a low 20% proportion of time deposits and fewer deposit campaigns.
· Easing credit cost with upside risk. KTB maintains its goal to reduce credit cost to 1.2-1.3% in 2024 (vs. 1.24% in 1Q24) from 1.43% in 2023, with low NPL formation in 1Q24. As 2024F loan growth is expected to be driven by government loans (which need no ECL), there is a chance 2024F credit cost will come in below our forecast of 1.3%. In 4Q23, it set aside 100% ECL against loans to ITD and its supply chain. Its LLR coverage of 175% (the sector’s third highest) in 1Q24 was in line with its target of >170%.
· Recovering loan growth, de-risking loan portfolio. KTB maintains its 2024 loan growth target at 3% in 2024 vs. -1% in 2023. 1Q24 loan growth was 1.6%, for the most part from government loans with a small increase in personal and mortgage loans and a decrease in SME loans, in line with its goal of de-risking its portfolio. As a state-owned bank, it is best positioned to tap government loans, on which risk-adjusted return is similar to or slightly better than that of corporate loans in some segments.
· Worst is over for loss on NPAs. KTB saw a big jump in loss on NPAs in 4Q23 and 1Q24 as it reviewed a revaluation of all NPAs, which is nearly completed It expects loss on NPAs to be substantially lower QoQ in 2Q24.
· Potential hike in dividend payout. The bank is considering lifting its dividend payout ratio to pre-COVID level of 35-38% vs. 33% in 2023. Assuming a 35% payout ratio, we forecast DPS of Bt0.97 for 2024, equivalent to 5.8% yield.
Action & recommendation. We keep KTB as Outperform with an unchanged TP of Bt22 (based on 0.7x PBV derived from 7% L-T ROE, 1% L-T growth, 9.6% cost of equity), in recognition of: 1) cheap valuation with good dividend yield, 2) lower asset quality risk than peers, and 3) continued earnings recovery. Key risks: 1) Asset quality risk from uneven economic recovery, 2) slower loan growth from weaker GDP than expectation, 3) ESG risk from market conduct and regulatory risk. Click here to read and/or download file KTB240430HighConviction_E | |
