Krung Thai Bank revs up core business for a strong rebound in 2016

What’s the fallout from SSI’s default?

After a disappointing 2015 led by a major loan default from Sahaviriya Steel Industries (SSI), Krung Thai Bank (KTB) has a plan to get back its groove and focus on core business. The state-run bank plans to pull back on retail and small business loans, segments which are becoming more vulnerable to default risk.

It will then try to make up for the lost income by cutting down costs and wooing high-margin banking clients. Analysts believe this is a sound strategy but profits will still likely take a hit from the SSI fallout.

“It is appropriate for the bank to be more cautious on new lending, especially in the segments that are currently witnessing accelerating NPL formations such as retail and small business sectors,” says Maybank Kim Eng.

KTB’s core business will remain solid going forward. The bank has been successful in improving its net interest margin by reaching out to higher-yielding customers and cutting funding costs. This will insulate net interest income from slower loan growth,” adds Maybank Kim Eng.

2016 will see KTB start to roll out its three-year business plan named “Summit II” that will focus on offering products such as wealth management, digital banking, and risk management.

“Fee income from these services could help boost earnings, offsetting the drag from slower loan growth. Thus, we view its pre-provisioning operating profit to remain resilient,” says Maybank Kim Eng.

KTB forecasts a robust growth of 25% for loans to medium-scale SMEs alone, and a 9% growth expected for medium and large-scale SMEs combined. Fee-based revenue should grow by more than 12% in 2016, compared with 15% in 2015 and 6-7% in 2014, according to KTB, as a results of its stronger focus on wealth management and digital banking.

Maria Lapiz, analyst at Maybank Kim Eng, reckons the Thai government will provide an increasing number of stimulus measures that will benefit KTB, and these will act as additional catalysts to its loan outlook.

KTB’s plan to boost its fee income follows a strong showing in 2015. Thananchai Jittanoon, analyst at UOB Kay Hian, notes that in the third quarter of 2015, KTB delivered strong fee income growth of 22% year-on-year during the quarter with bancassurance and card operations coming in as key growth drivers.

Other non-interest income also grew strongly, driven by a 48% jump in foreign exchange income. Overall, non-interest income surged 17% y-o-y, beating our forecast of 13% y-o-y growth.

What’s the fallout from SSI’s default?

Edward Lane – SNL Financial
Krung Thai Bank posted a 42.2% year-over-year drop in third-quarter net profit, the steepest fall, with consolidated nonperforming loans jumping 59.22% as of September 30 from December 31, 2014.

If it were not for newly classified bad debt linked to the troubled steel company, the increase would have been 19.11%, the bank said when it released third-quarter results. Provisions for bad debt and doubtful accounts swelled 162.44% in the three months to September from the 2014 third quarter.

Maybank Kim Eng
Reported profitability is likely to be depressed by the elevated credit cost in an effort to boost the non-performing loan (NPL) coverage ratio back to the pre-SSI reclassification on 125%. Thus, return on equity may remain unimpressive.

Thananchai Jittanoon– UOB Kay Hian
After SSI’s loan default, KTB’s NPL balance jumped 36% quarter-on-quarter to THB91.5 billion or 4.03% of total loans. Excluding SSI’s defaulted loans, the bank’s NPL balance inched up 1% q-o-q to THB68.5 billion or 3.05% of total loans.

KTB’s third quarter 2015 earnings came in 16% below our forecast on higher-than-expected provisions. Core operating profit, however, came in ahead of our forecast on strong non-interest income growth. With the SSI overhang removed, we expect KTB’s bottom line to recover strongly in the upcoming quarters. KTB delivered strong fee income growth of 22% yoy during the quarter with bancassurance and card operations coming in as key growth drivers. Other non-II also grew strongly.