Kiatnakin Phatra Bank: Waiting for the tide to turn
- 3Q24 earnings came in at THB1.3bn (+1.9% y/y; +69.7% q/q)
- Fee income increased y/y and q/q from improved capital market conditions
- FY24F/FY25F earnings raised by 15%/7% to bake in strong 3Q24 results
- Maintain HOLD with a higher TP of THB57.00
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Waiting for the tide to turn
Results beat expectations on lower-than-expected ECL. 3Q24 net profit came in at THB1.3bn (+1.9% y/y; +69.7% q/q), beating the Bloomberg consensus and our estimate of THB918mn and THB817mn, respectively, thanks to higher-than-expected fee income and lower-than-estimated expected credit loss (ECL).
The y/y and q/q increases were attributed to higher fee income (from improving capital market conditions, resulting in higher fees from brokerage business and wealth management business) and lower ECL.
Pre-provision operating profit (PPOP) decreased 28.0% y/y and 17.1% q/q. The y/y decline was due to lower net interest income (NII) (from loan and net interest margin [NIM] contraction) and higher operating expenses (OPEX) (from higher employee expenses).
Meanwhile, the q/q decrease was attributed to lower NII (from loan contraction) and higher OPEX (from higher employee expenses– i.e., accrued staff variable compensation with an expectation of improving operating performance amid improving capital market conditions).
Note that non-NII increased 330% y/y and 2.0% q/q in 3Q24. The y/y increase was thanks to higher fee income, higher mark-to-market gain on investments, and lower loss from sale of repossessed cars (i.e., THB1.22bn in 3Q24 vs. THB1.36bn in 3Q23).
Nonetheless, the q/q increase was attributed mainly to higher fee income. Note that loss from sale of repossessed cars increased q/q, i.e., THB1.22bn in 3Q24 vs. THB1.07bn in 2Q24.
9M24 profit accounted for 77% of our new full-year forecast.
Loans contracted 4.8% q/q and 6.6% YTD-Sep. Retail loans (69% of total loans) declined 4.6% YTD, due mainly to the decrease in hire purchase (HP) loans (47% of total loans; -8.5% YTD), while other retail loans increased YTD – i.e., housing loans (15% of total loans; +2.9% YTD), personal loans (4% of total loans; +5.0% YTD), and micro-SME loans (4% of total loans; +8.9% YTD).
Corporate loans (13% of total loans) decreased 13.2% YTD, while commercial (SME) loans (15% of total loans) declined 4.3% YTD.
NPL and coverage ratio remained relatively stable. NPLs declined 0.5% q/q to Bt15.5bn at end-3Q24, thanks mainly to the decline in NPLs from SME and corporate segments, offsetting the increase in NPLs from retail segment. However, the NPL ratio ticked up to 4.1% (vs. 4.0% at end-2Q24) due to loan contraction.
KKP set aside a lower ECL of THB681mn (-59.4% y/y; -61.5% q/q) in 3Q24, thanks to (i) stabilising loan delinquency and stagging, (ii) improved asset quality in new loans, (iii) the reclassification of one corporate loan from stage 3 to stage 2 (resulting in some credit costs being released in the quarter), and (iv) a slowdown in loan volume.
With that, coverage ratio remained relatively stable at 136% at end-3Q24.
Capital position remains strong. CAR stood at 16.88%, with Tier 1 ratio at 13.38%, compared with the BOT’s minimum requirements of 11.00% and 8.50%, respectively.
Key highlights for 3Q24:
- Loss from sales of repossessed cars surprisingly increased in 3Q24. Loss from sale of repossessed cars (LOS) increased q/q in 3Q24, with an average loss per unit (i.e., loss given default – LGD) ticking up to above 50% again (vs. c.47% in 2Q24).
According to management, though the number of cars repossessed declined, the number of repossessed cars sold increased q/q in 3Q24. That, together with a higher LGD, has led to higher LOS of THB1,216mn in 3Q24 (vs. THB1,073mn in 2Q24).
Nonetheless, its car inventory declined in 3Q24, which should reduce the pressure to accelerate the repossessed car sales, implying a potential for improvement in LOS.
Note that most repossessed cars are derived from used-car HP granted in 2022-1H23, when used-car prices were abnormally high due to the supply shortage of new cars. Management believes it may take 12-18 months to flatten the NPL curve (for its 2022-1H23 HP portfolio).
Good news is among the repossessed cars in 3Q24, there nearly were no cars from HP loans granted in 1H24, implying that its new HP loans were of high quality – as normally approx. six months after loan initiation, we tend to see bad loans. - Fee income increased y/y and q/q from improved capital market conditions, largely in Sep 2024, resulting in higher income from brokerage business, asset management business and investment banking (IB) business. We believe the momentum will continue in 4Q24F.
Management revealed that the pipeline for corporate fund raising through the capital market remains solid. Nonetheless, the timing of the transactions is uncertain. - Credit cost – including LOS – to edge down in FY25F. Management has guided that the number of repossessed cars sold is normally high in 4Q; however, it had already front-loaded some of its repossessed car sale in 3Q24, implying that 4Q24F likely to see the lower number of repossessed cars sold. Nonetheless, LOS in 4Q24F will also depend on LGD at that time. We estimate LOS to remain stable at THB1.2bn in 4Q24F and decline to THB1.0bn in 1Q25F.
Meanwhile, ECL should tick up in 4Q24F, given an absence of the reclassification of one corporate loan as booked in 3Q24. We expect ECL to improve in FY25F from improving quality of new loans and ongoing HP portfolio contraction.
Active capital management instead of balance sheet expansion. With unfavourable market conditions and outlook for auto loan (HP) expansion, management believes negative loan growth may continue in FY25F.
With that, and its high capital level, management may opt to be active on capital management – including dividend payout and share buyback – instead of balance sheet expansion.
Recall that the Board of Directors of KKP approved, on 22 Aug 2024, the share repurchase programme for financial management purposes, with the number of shares to be repurchased not exceeding 22mn shares, or not exceeding 2.6% of total paid-up shares, during the period of 28 Aug 2024 and 28 Nov 2024, with maximum amount of THB950mn.
As at end-3Q24, the bank had already repurchased 11mn shares (c.50%) under the share repurchase programme, with a total value of THB530mn.
Also, on 19 Sep 2024, KKP paid an interim DPS of THB1.25 from its 1H24 performance, implying a 46.5% payout.
FY24F/FY25F earnings raised by 15%/7%. As we incorporated KKP’s 3Q24 results and revised our key assumptions for FY24F/FY25F, we raised FY24F/FY25F earnings by 15%/7%.
Specifically, we revised (i) our FY24F/FY25F loan growth assumptions to -8%/-4% (vs. -3%/3% previously), (ii) credit cost to 117bps/130bps (vs. 142bps/150bps previously), (iii) NIM to 4.32%/4.27% (vs. 4.20%/4.12% previously), (iv) C/I ratio to 56.2%/55.0% (vs. 54.3%/53.5% previously), and (v) LOS to THB4.8bn/THB3.8bn (vs. THB4.8bn/THB4.0bn previously).
With that, we now expect KKP’s earnings to contract by 14.1% y/y in FY24F and another 4.5% in FY25F.
Maintain HOLD with a higher TP of THB57.00. As we incorporated KKP’s 3Q24 results, we revised our key assumptions for FY24F-FY25F and rolled over our valuation base to FY25F. With that, we derive a higher TP of THB57.00 (vs. THB44.50 previously) for KKP. Our TP is based on 0.75x FY25F P/BV, i.e., 1SD below its 5-year average P/BV. While we believe KKP’s asset quality issues have reached their lowest point, we believe recovery takes time. With that, our HOLD rating stands.
THB mn | 3Q24 | 3Q23 | y/y (%) | 2Q24 | q/q (%) |
NII | 4,937 | 5,988 | (17.5) | 5,009 | (1.4) |
Fee income, net | 1,483 | 1,337 | 10.9 | 1,171 | 26.6 |
Non-NII | 481 | 112 | 329.6 | 472 | 2.0 |
Total operating income | 5,419 | 6,100 | (11.2) | 5,481 | (1.1) |
Total operating expenses | 3,139 | 2,936 | 6.9 | 2,737 | 14.7 |
PPOP | 2,279 | 3,164 | (28.0) | 2,751 | (17.1) |
ECL | 681 | 1,678 | (59.4) | 1,769 | (61.5) |
Net profit | 1,305 | 1,281 | 1.9 | 769 | 69.7 |
EPS (THB) | 1.55 | 1.51 | 2.6 | 0.91 | 70.3 |
% | 3Q24 | 3Q23 | y/y (ppts) | 2Q24 | q/q (ppts) |
NIM (bps change) | 4.36 | 5.05 | (69.0) | 4.29 | 7.5 |
ROAA | 1.01 | 0.95 | 0.1 | 0.58 | 0.4 |
ROAE | 8.44 | 8.53 | (0.1) | 4.94 | 3.5 |
Cost-to-income ratio | 57.93 | 48.80 | 9.1 | 49.94 | 8.0 |
Credit cost (bps) | 73.95 | 173.64 | (99.7) | 186.28 | (112.3) |
THB bn | 3Q24 | 3Q23 | y/y (%) | 2Q24 | q/q (%) |
Loans | 360 | 387 | (7.1) | 378 | (4.8) |
Deposits | 344 | 350 | (1.7) | 369 | (6.8) |
% | 3Q24 | 3Q23 | y/y (ppts) | 2Q24 | q/q (ppts) |
LDR | 104.45 | 110.60 | (6.1) | 102.23 | 2.2 |
LDR+borrowings | 93.74 | 93.01 | 0.7 | 90.42 | 3.3 |
Coverage ratio | 136.06 | 145.29 | (9.2) | 136.47 | (0.4) |
NPL | 4.10 | 3.50 | 0.6 | 4.00 | 0.1 |
CAR | 16.88 | 16.43 | 0.4 | 16.94 | (0.1) |
T1 | 13.38 | 12.95 | 0.4 | 13.61 | (0.2) |
T2 | 3.50 | 3.48 | 0.0 | 3.33 | 0.2 |
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