Analyst Sees an Improvement of KTC Asset Quality in 2H20, Recomm. “BUY” with a TP of ฿37

Maybank Kim Eng Securities (Maybank) sees a gradual asset quality improvement in KrungThai Card Public Company Limited (KTC) in 2H20, maintaining the “BUY” recommendation with a target price of ฿37/share.

 

Maybank expects near term hiccups from weak card spending and asset quality, KTC should be able to withstand them given its solid balance sheet with low leverage and high loan loss reserve. Maintain BUY with TP of ฿37 (4.2x FY20E P/BV and 17.3x P/E). Key risks are asset quality deterioration and further debt relief measures from the regulator. KTC will announce 2Q20 results on 17 July.

 

Expect weak operations in 2Q   

Maybank expects KTC to post 2Q20E earnings of ฿1.16 billion, down 12% YoY and 29% QoQ, due to weak card spending and higher credit cost. Its card spending fell 40% YoY in April (vs 48% for industry) and rebounded to -25% in May and -8% in June following the reopening of businesses. Maybank forecasted non-NII to decline 7% YoY due to the lower credit usage fees and bad debt recovery. We expect OPEX to drop 4% YoY as KTC would have partly offset weak revenue by cutting marketing expenses.  

 

Asset quality expected to improve in 2H20

Expecting a higher NPL ratio of 7.1% from 4.0% in 1Q20 due mainly to the lockdown in 2Q20. Provisions should increase 41% QoQ to ฿1.8 billion in 2Q20 while credit cost should increase to 9.0% in 2Q20 from 6.2% in 1Q20. Looking into 2H20, asset quality should gradually improve due to its tightened loan approval criteria to reflect a lower interest rate charged. Note that KTC did not postpone loan classification downgrades as some other banks did so its asset quality data reflects the actual impact from Covid-19.

 

Customers preserve credit line for liquidity needs

KTC guided that there are 4,000 customers with total loans of ฿300 million (0.4% of loan book) that discontinued their existing credit line and converted to a long term loan. The low amount of debt relief has confirmed our view that customers prefer to preserve their credit line for liquidity needs. Note that customers would get a lower interest rate of 6ppts for credit card and personal loan if they converted to a long term loan.