With a beat from FVTPL gain, KBANK’s 2Q23 results reflected rising NPL inflow with QoQ stable credit cost, contracting loans, better NIM, weaker fee income and a QoQ rise in cost to income ratio. At the analyst meeting, KBANK guided to a delay in the return of normalized ECL and completion of B/S clean up. We rate Neutral with a cut in TP to Bt143 from Bt146.
2Q23:Slight beat to INVX, in line with consensus. 2Q23 net profit was Bt10.99bn (+2% QoQ, +2% YoY), 8% above us but in line with consensus, on FVTPL gain.
Highlights.
- Asset quality: NPLs rose 6% QoQ (+20% QoQ, if write-offs are added back). Credit cost was up 3 bps QoQ to 2.08%. LLR coverage fell to 138% from 146% at 1Q23. KBANK now expects 2023F credit cost of 2-2.1% (vs. original guidance of 1.75-2%), with the return to normalized credit cost of 1.4-1.6% delayed from 2024 to 2025 (probably 2H24, if the economy is good). 2024 will see more B/S cleanup, following 2022 and 2023. We maintain our credit cost forecast at 2.1% in 2023 and 1.9% in 2024.
- Loan growth: -0.6% QoQ, -1.6% YoY, -1.8% YTD, due to NPL management. If the effect of NPL outflow management is excluded, YTD loan growth would be flat. The bank expects 2023F loan growth to be lower than guidance of 5-7%. We cut 2023F loan growth to 2% from 5%.
- NIM: +17 bps QoQ, as a 26 bps QoQ rise in yield on earning assets exceeded a 13 bps QoQ rise in cost of funds.
- Non-NII: Better than expected, -1% QoQ (+24% YoY) with a larger gain on financial instruments (-4% QoQ,). Net fee income fell 5% QoQ (-5% YoY), on lower brokerage fees, underwriting fees, fees from acceptance, aval and guarantee and loan-related fee income. KBANK expects 2023F fee income to be lower than its guidance of zero growth.
- Cost to income ratio: +65 bps QoQ, -53 bps YoY to 43%, worse than expected. The bank keeps its cost to income ratio target at low to mid 40%. We expect 2023F cost to income ratio of 44% in 2023F.
2H23F earnings outlook: Lower HoH with NIM upside. 1H23 earnings accounted for 55% of our full-year forecast (+10%). We expect 3Q23F earnings to slip QoQ (higher provisions and lower gain on financial instruments) and be stable YoY, with a fall in 2H23 HoH from high ECL and a seasonal rise in opex. We see upside to NIM from the potential further hike in policy rate to 2.5%.
Maintain Neutral with a TP cut. We maintain our Neutral rating with TP cut to Bt143 (0.6x 2024F PBV) from Bt146 as we de-rated PBV target to 0.6x from 0.65x to reflect a delay in a resumption of normalized ECL and B/S clean up.
Key risks: 1) Asset quality risk from global economic slowdown, 2) downside risk to loan growth from weak loan demand and high competition, 3) non-NII under pressure from volatile capital market and potential tighter regulations.
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