Thailand Banks: Upgrading kBank to OW and KTB to N; sector thesis intact post 2Q

Research evidence excerpt

Thailand Banks: Upgrading kBank to OW and KTB to N; sector thesis intact post 2Q

cohort. Our confidence in earnings growth further comes from a starting

point of high reserves (7.4% LLR/loans, 203% NPL coverage), a high portion

of PPoP being consumed by provisions in the last decade (42%) and high

CET1/Equity to Asset ratio of 17.5/12.3% as of Jun-26. Basically, the bank

balance sheets are fortified, further helped by tight underwriting in the last 10

quarters (1.2% cumulative industry loan gr in 1Q24 to 2Q26). Hence, any shift

in GDP growth should lead to a disproportionate P&L impact.

• A brief flashback: In the last 15Y, banks have almost consistently

disappointed on earnings, as provisions as a % of PPoP increased and stayed

high. Further, tepid GDP growth and credit demand/supply/quality interacted

to create a spiral that led to large scale strategic shifts. Examples include

KBank’s SME mix reducing to 24% from 42% in 2011, BBL’s acquisition of

Bank Permata in 2020 at 1.8x PB and SCB’s reorganization in 2021 to SCBX.

The most telling was amassing of capital (banks deleveraged to 8x A/E from

9.6x in the last 10Y).

• Valuation framework is shifting as a result of these changes. Previously, a

discount to book based on PB/RoE, with high CoE, was the main valuation

metric. Now, we expect PE and PEG as the dominant drivers of valuation in an

era of EPSg. In the interim (over last 2Y), DY and DY spread has been the main

valuation metric. Thought another way, we do expect the sanctity of the PB/

RoE framework to hold, but with lower CoE and higher terminal growth. Our

PTs are based on 3.6% RFR, 6% MRP, 1.1-1.2 beta and 2.5-3.5% g. The

resultant RoE/CoE gap is almost closed now vs. RoE being 330bps below CoE

Equity Ratings and Price Targets