As expected, KTC’s 2Q23 results reflected worsening asset quality, decent loan growth, better NIM, stable non-NII, and rising cost to income ratio. We maintain Underperform with a cut in TP to Bt44 to reflect a 5% cut in earnings forecast and the impact from the BoT’s Persistent Debt (PD) measures.
2Q23: In line. KTC reported 2Q23 net profit of Bt1.81bn (-4% QoQ, -5% YoY), in line with INVX and consensus forecast.
Highlights.
- Asset quality: NPLs were worse than expected, up 10% QoQ with a 15 bps QoQ rise in NPL ratio. Credit cost rose 16 bps QoQ (+109 bps YoY) to 5.48%. From 462% at 1Q23, LLR coverage fell to 433%. We raise our 2023F credit cost by 10 bps to 5.35% (+37 bps) to fine tune with 5.35% in 1H23, with signs of rising NPLs.
- Loan growth: +2.1% QoQ, +10.4% YoY, +1.4% YTD vs. its full-year target of +15%. Credit card loans grew 1.5% QoQ, +11.8% YoY, -1.1% YTD). Personal loans grew 3.2% QoQ, +9.6% YoY, +3.5% YTD vs. the 2023 target of +7%. Growth in leasing loans slowed from 35% QoQ in 1Q23 to 7% QoQ in 2Q23 as it slowed its loan disbursement after NPLs rose. Title loans at P BERM were Bt1.66bn (+118.6% YoY), far behind its Bt9bn 2023 target. We expect 2023 loan growth of 13%.
- NIM: Better than expected, +48 bps QoQ due to a 57 bps QoQ rise in yield on loans with a 13 bps QoQ rise in cost of funds.
- Non-NII: +1% QoQ (+6% YoY), weaker than expected. Fee and service income was stable QoQ and +11% YoY. Credit card spending rose 16.3% YoY, beating its 15% target. Bad debt recovery fell 7% QoQ and 10% YoY.
- Cost to income ratio: +144 bps QoQ, -42 bps YoY, worse than expected. Opex rose 8% QoQ and 7% YoY, higher than expected.
Cut earnings forecast. We cut earnings forecast by 5% each for 2023F and 2024F, mainly on credit cost and non-NII. 1H23 accounted for 50% of our full-year forecast (+4%). In 3Q23, we expect earnings to recover slightly QoQ and YoY, as a continued rise in loan growth will be partly offset by higher ECL.
Potential impact from the PD measures. Effective from April 2024, the BoT will apply Persistent Debt (PD) measures to revolving personal loans for customers with a monthly income not exceeding Bt20,000 for banks (including KTC as KTB’s subsidiary) in cases where the interest paid exceeds the principal over a period of 5 years. This group of borrowers will be provided with the option to convert their loans into term loans with a reduced interest rate not exceeding 15%, which will enable them to complete repayment within 5 years. KTC estimates that the PD measures will slice ~Bt18mn/month off interest income if all eligible customers take advantage of the offer. The after-tax impact is equivalent to 2% of 2023F earnings.
Maintain Underperform. We maintain Underperform with a cut in TP to Bt44 (2.8x PBV for 2024F) from Bt52 as we see its valuation as rich.
Key risks: 1) Asset quality risk from a step up in credit card minimum payment from 5% to 8% in 2024 and 10% in 2025 and an uneven economic recovery, 2) NIM risk from a further policy rate hikes and 3) the BoT’s household debt measures.
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