• NPL ratio will rise because KBANK plans to sell less NPL; provision is sufficient to support unsecured lending
• 4Q18 net profit grew 23% yoy to Bt7bn on lower credit cost but fell 28% qoq on weak non-NII
• Cut FY19-20F EPS by 2% each after assuming higher credit cost; OUTPERFORM, lowered TP to Bt215, implying 12.5x FY19F P/E and 1.2x P/BV

Targets to grow small-ticket unsecured loans this year

We attended the analyst meeting last Friday. The management is keeping FY19 financial targets and plans to use data analytics to grow small-ticket unsecured loans via digital platform. The bank affirmed guidance for higher NPL ratio of 3.3-3.7% is due to its strategy to sell less NPL and collect bad debts themselves. KBANK sold Bt15.3bn NPL in 2018, up 20% yoy. On a positive note, we expect credit cost to drop to 165bp in 2019 (vs guidance of ‘up to 165bp’) from 175bp in 2018 and guided that current provision is sufficient to support unsecured lending via digital platform. KBANK is targeting 9-12% retail loan growth this year. On a negative note, the bank remains cautious of SME loans as relapse rates remain high.

FY18 loan growth in line but fee income remains weak

KBANK reported Bt7bn net profit for 4Q18, up 23% yoy (on lower credit cost) and down 28% qoq (on weak non-NII). FY18 profit grew 12% yoy on smaller provisions. Loans grew 5.2% yoy and 1.7% qoq in 4Q18 led by corporate and mortgage loans. NIM fell 2bp qoq to 3.41% in 4Q18, which led FY18 NIM to drop 5bp yoy to 3.39%. Non-NII fell 15% yoy and 4% qoq on weaker loan-related and money transfer fees. Net insurance income turned to positive in 4Q18 from loss in 3Q18 but FY18 number fell 40% yoy to Bt3.5bn due to intensifying competition and tighter regulations. Cost-to-income ratio (CIR) rose to 51.2% in 4Q18 from 42.6% in 3Q18 due to seasonal OPEX, which pushed up FY18 CIR to 44.0% from 42.3% in FY17.

Cut earnings and TP to Bt215 from Bt235

We cut FY19-20F earnings by 2% after raising credit cost assumptions to 165bp. We now expect earnings to grow 7% yoy on better NIM (+4bp) and lower credit cost (-10bp) in FY19F. The bank should be a prime beneficiary of rising interest rates because it has the highest CASA ratio. Key risks are weak non-NII growth and asset quality.