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Thailand's Krung Thai Bank (KTB): Expecting terrible 2Q net earnings(Thai Press Reports Via Thomson Dialog NewsEdge) Section: Stocks - KTB is expected to report terrible 2Q07 net profits of just Bt825m, plummeting 78% YoY and 82% QoQ. The sharp decrease both QoQ and YoY is mainly attributed to expectations of much higher provisions in 2Q07. Nevertheless, pre-provision operating profits (PPOP) is expected to increase by 8% QoQ, while falling 19% YoY. Key items expected to be seen in the results are as follows: - Loan recovery. Loans are expected to expand by approximately Bt20bn (consolidated), or by 2.3% QoQ in 2Q07, and rise just 2.8% comparing on a YoY basis. However, this is only up Bt2.1bn YTD mainly due to huge repayments in 1Q07. The loan recovery in 2Q07 was mainly government-related, while the bank guided for flat corporate and a slight improvement in retail-related loans. - Margin deterioration. Overall, net interest income is expected to drop 10.9% YoY (-3.5% QoQ). NIM is expected to contract by 56bp YoY to 3.54%, and come down by 20bp from 1Q07. KTB aggressively slashed its lending rate in April (-50bp) so it is among the only banks that will see its NIM hurt substantially. 2Q07 NIM is expected to be the lowest this year. It will likely recover in 2H07 once deposits re-price at lower rates. - Solid non-interest income. Non-interest income is expected to increase by 42.7% YoY (+2.7% QoQ). A 15% YoY is expected to rise in fee income. Furthermore, we still expect to see a decent contribution from forex activities (double YoY). - Non-interest expense (NIE). NIE is expected to shoot up by 16% YoY mainly on the back of higher personnel expenses (pay rises), channel expansion and IT system upgrade-related expenses. Nevertheless, NIE is forecasted to drop by 9.6% QoQ mainly due to the absence of Bt1.3bn in bonus-related expenses that were charged in 1Q07. - Expecting huge provisions. Provisions are expected to come in at Bt5.0bn on a consolidated basis, which is much higher than the Bt1.9bn in 2Q06 and the Bt1.1bn posted last quarter. This was the main cause of the huge drop in the bottom line. The reason behind our huge provision forecast is because we expect to see a sharp increase in NPLs (both new and re-entry). Asset quality the biggest threat to the bottom line this year. KTB's president, Mr.Apisak Tantivorawong, expressed his concern about the bank's new NPLs that were the result of the aggressive expansion during the White Knights period (2001-03). During that time, loans expanded by Bt278bn, or 39.4%. Assuming 5-10% of those loans become NPLs, this means there is the potential of Bt14-28bn worth of NPLs ahead. So KTB will need to set aside huge provisions again this year to take care of new NPLs. Earnings have become even more vulnerable with the bank's NPL coverage ratio (LLR/NPL) of just 38% at the end of 1Q07. Downgrade to HOLD from Buy; maintain target price of Bt14.8. Although huge provisions are expected in this year (NPL-related), valuation is already rolled over into 2008. Furthermore, the share price has risen significantly over the past few weeks. Therefore, upside to target is now lower than the 15% benchmark, prompting us to downgrade the shares to HOLD from Buy. Over the short term, the counter could come under pressure due to huge provisions, mainly because of NPLs. But this issue will be resolved by year-end as IAS39 must be conformed to by then. Huge provisions will only make the bank stronger, so a steep pullback in the share price would present a good entry point. (IV Global Securities: 9 July 2007) Copyright 2007 Thai News Service, Source: The Financial Times Limited |