KGI Securities Gives “Outperform” KTB a TP ฿21.50 from Bank Merging

KTB is currently one of the shares that is being discussed in and out of the market. Whether it be the AQ estate’s case that will be put in an auction soon, or the merging business between KTB and TMB. KGI Securities has put an in-depth analytic on the status and potentially yield from the merging banks situation, giving KTB to be the outperformed shares.

KTB’s share price has been partially dominated by potential acquisition, which may be done through sharp swap with TMB Bank (TMB.BK/TMB TB)*. Regardless of the acquisition, KGI does not see any downside for KTB given its undemanding valuation, loan growth acceleration with government investment policy, asset quality improvement, and credit cost reduction. KTB remains our top pick in the sector. KGI rates the counter Outperform with a 12 months target price of ฿21.50/share with 5.9% upside and downside.

 

Acquisition may happen any time
The merger of TMB and KTB could happen at any time depending on policymakers as the major shareholders of both banks are state enterprise entities. The Ministry of Finance (MoF) is currently the major shareholder of TMB with a 25.9% stake and ING is the second largest with a 25% stake. Meanwhile, KTB is controlled by FIDF (an entity under Bank of Thailand), which has a 55% stake.

 

MoF’s cost of investment at TMB of Bt3.80/share is obstacle to a merger deal
Divestment of TMB by the MoF and merger of TMB with another bank have been repeatedly discussed for many years. A merger between TMB and KTB is actually considered as a good combination since both have different focuses in depositors and sources of funding, customer base lending, and fee income combination.

TMB’s strength in competitive funding, lending base, and deposit policy would help KTB improve its core banking on several fronts. Though TMB has a smaller asset size than KTB and no deposit base from state enterprise, its cost of funding is very competitive and cheaper than Bangkok Bank (BBL.BK/BBL TB) by around 5bps and KTB by around 10bps.

However, a merger would not be easy, with the main obstacle being MoF’s cost of investment in TMB at around ฿3.80/share or around ฿3.50/share if accumulated dividend income during 2011-2017 is deducted. TMB’s share price has never reached ฿3.80 over the past 15 years, so setting the merger price at MoF’s cost of investment makes the merger deal difficult.

 

A share swap and merger pricing
A merger of TMB with KTB would likely be through share swap and based on implicit pricing of TMB and KTB so the merger pricing ranges widely. KGI ran a sensitivity analysis on the merger pricing and share swap ratio by assuming TMB’s implicit pricing ranging from ฿2.10-฿3.80. The swap ratio ranges from 10 TMB : 1 KTB to 5.6 TMB : 1 KTB. If the implicit merger price of TMB is set at the MoF’s investment cost of Bt3.80/share, it would be mean 5.6 TMB : 1 KTB (Figure 1).

The swap ratio of this deal is a puzzle as share and earnings dilution would be considered first and several factors next. Assuming a swap ratio 10 TMB : 1 KTB, the merger deal would favor KTB as it would create share dilution of around 24% but earnings at the new company will increase by 30%, implying a merger would enhance KTB’s earnings by around 7%. In KGI’s base case, it sees TMB’s swap pricing at Bt3.00 as reasonable as PBV is not too high at 1.4x and share dilution offsets earnings dilution.

 

Swap price for TMB at ฿3.00 implies swap ratio of 7:1
This pricing implies PBV of 1.4x, which is in line with historical acquisitions of Thai banks, no earnings dilution, extra capital to boost excess Tier I capital and trigger higher dividend payout and extra dividend in the short-term of 1-2 years. At TMB’s swap price of ฿3.00, new capital would enhance Tier I (at new company) >15% and that would trigger KTB to raise dividend payout >45% (vs. 37-38% currently) for at least 2 years and imply dividend yield of >4%-5%.

 

Miscellaneous factors deviate merger deal
Normally, economic profit will enhance profitability at the newly merged firm as layoffs will take place. However, as a state enterprise entity, KGI are concerned that staff layoffs may not be easy. Another factor would be KTB’s state enterprise status as the equity stake of MoF + FIDF will be less than 50% after merger (vs. currently 55% held by FIDF).