Kasikornbank’s Inaugural AT1 – Underweight on Franchise Challenges and Valuation

Thai Bank Capital and Chronic COVID-19 Sensitivity

Krung Thai Bank – Lower Credit Tail Risk

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Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary:  We recommend that investors Overweight <a href="https://www.smartkarma.com/entities/krung-thai-bank-pub-co-ltd" target="_blank" data-smartkarma-citation="entities:298:1" rel="noopener">Krung Thai Bank's (KTBTB)</a> recently issued Additional Tier 1 (AT1) bond. Krung Thai’s published credit metrics are on-par with, if not superior to, its Thailand-based peers as well as <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a>. Furthermore, after adjusting for Covid-19 relief exposure, KTBTB has a higher capital buffer and a superior pre-provision earnings ability relative to <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank (KBank)</a> and <a href="https://www.smartkarma.com/entities/tmb-bank-pcl" target="_blank" data-smartkarma-citation="entities:8090:1" rel="noopener">TMB Bank (TMB TB)</a>. As such, we believe that Krung Thai’s recently issued AT1 note should compress to, if not through, KBank’s bond.Thailand-headquartered banks face both a net profit and a capital buffer test towards determining their ability to make optional distributions, such as dividends, bonuses, and Additional Tier 1 coupons. Unfortunately, Thai-bank AT1 spreads bear no relationship relative to their respective capital buffers. This suggests that other concerns may be driving their respective valuations.We note that loans under COVID-19 relief measures remain subject to an IFRS9 staging standstill under Bank of Thailand regulations until the end of 2021, according to Krung Thai Bank. Given the large amount of relief provided by Thai banks over the last year, and more that may develop in the future, current earnings power and capital buffers may overstate each banks’ ability to make optional distribution payments over time.Therefore, a complete analysis on the fair value of a Thai-bank security should incorporate the capital buffer and pre-provision earnings that may be at risk from Covid-19 relief loans that could go sour.  We undertake this analysis within.Taken together, we conclude that after adjusting for Covid-19 relief exposure, KTBTB has a higher capital buffer and a superior pre-provision earnings ability relative to Kasikornbank and TMB Bank. As such, we believe that Krung Thai’s recently issued AT1 note should compress to, if not through, KBank’s, bond. Issued last week at a spread of T+353, and currently trading at T+ 330, we see at least 30bps of upside remaining for investors in KTBTB’s bond. As such, we recommend that investors Overweight Krung Thai Bank’s 4.4% coupon 2026 callable AT1 note.

Executive Summary:  We recommend that investors Overweight Krung Thai Bank's (KTBTB) recently issued Additional Tier 1 (AT1) bond. Krung Thai’s published credit metrics are on-par with, if not superior to, its Thailand-based peers as well as Standard Chartered (STAN LN). Furthermore, after adjusting for Covid-19 relief exposure, KTBTB has a higher capital buffer and a superior pre-provision earnings ability relative to Kasikornbank (KBank) and TMB Bank (TMB TB). As such, we believe that Krung Thai’s recently issued AT1 note should compress to, if not through, KBank’s bond.Thailand-headquartered banks face both a net profit and a capital buffer test towards determining their ability to make optional distributions, such as dividends, bonuses, and Additional Tier 1 coupons. Unfortunately, Thai-bank AT1 spreads bear no relationship relative to their respective capital buffers. This suggests that other concerns may be driving their respective valuations.We note that loans under COVID-19 relief measures remain subject to an IFRS9 staging standstill under Bank of Thailand regulations until the end of 2021, according to Krung Thai Bank. Given the large amount of relief provided by Thai banks over the last year, and more that may develop in the future, current earnings power and capital buffers may overstate each banks’ ability to make optional distribution payments over time.Therefore, a complete analysis on the fair value of a Thai-bank security should incorporate the capital buffer and pre-provision earnings that may be at risk from Covid-19 relief loans that could go sour.  We undertake this analysis within.Taken together, we conclude that after adjusting for Covid-19 relief exposure, KTBTB has a higher capital buffer and a superior pre-provision earnings ability relative to Kasikornbank and TMB Bank. As such, we believe that Krung Thai’s recently issued AT1 note should compress to, if not through, KBank’s, bond. Issued last week at a spread of T+353, and currently trading at T+ 330, we see at least 30bps of upside remaining for investors in KTBTB’s bond. As such, we recommend that investors Overweight Krung Thai Bank’s 4.4% coupon 2026 callable AT1 note.   

Krung Thai Bank Pub

Krung Thai Bank: Overweight This AT1 Gem