@kbank final

KasikornBank Group ThammasatConsulting


KASIKORNBANK GROUP

By: Chananun Pantira PanthareeTanwa


AGENDA

• Company Profile

• Situation Analysis

• Issues and Objectives Identification

• Recommendations

• TimeLine

• Financial Justification

• Key Success Factors

• Conclusion


Company Profile

• Leading Financial Institution in Thailand• Founded in 1945• Listed on SET in 1976

• Reinvented the Entire Corporation in 2005 as “KASIKORNBANKGROUP” promoting itself as ‘full-range of financial service provider’• Moving toward “K Excellence” Concept

Kasikorn Bank

KFactoring

KAsset Management

KLeasing

KSecuritites

KResearch Center

KasikornBankGroup

Mr.Banthoon LamsamCEO, KasikornBank


Situation Analysis

1997 20061998 2000

Financial Crisis

NPLs = 43% of total outstanding loan


Situation Analysis

1997 20061998 2000

BOT’s “Financial Master Plan”(FMP)

NPL s decreased to 8.29%

M&A of Small and Medium Banks

Promote “Universal Banks”

Opening FTA with USA

IntenseCompetition

IntenseCompetition


Situation Analysis

1997 20061998 2000




IntenseCompetition

Slow Down in Economy Expansion

• Rising oil price• Rising interest rates


Corporate45.45%

Industry Customer Segment

SME 36.39%

End consumer18.16%

Situation Analysis


Corporate45.45%

SME 36.39%

End consumer18.16%

KBank is Losing itsLeading Position to BBL

BBL 24.97%

KTB 34.29%

TMB 13.64%

KBank 12.22%

SCB 14.88%BBL 20.83%

KTB 21.45%

TMB 9.86%

KBank 15.81%

SCB 32.04%

BBL 27.72%

KTB 17.84%

TMB 15.9%

KBank 29.46%

SCB 9.07%

Situation Analysis

Industry Customer Segment


Issues Identification

Where Kasikorn Is

One of the top 5 Thai banks

Providing one stop financial service

With the position of innovative and modern

Maintain the Leadership Position in

Thai Banking Industry in

terms of Size and Market

Share

Intense Competition

To Strengthen

CollaborationAmong

Subsidiaries

Where Kasikorn Wants to Acheive


Maintain leading position in the industry

Issues Objectives

Fast growing ThaiAutomotive market

Create & realize synergy and provide

high quality services

Intense Competitio

n

Strengthening

CollaborationAmong

Subsidiaries

Issues Identification


Target Selection

K Bank Customer Segment

• SME 56%

• Corporate 29%• End Consumer

15%

K-Bank’sCurrent Focus

Fast GrowingSegment : Emerging Opportunity

Fending Off Intense Competition and Maintain Leadership Position in Banking Business

Recommendation I


SMEs End Consumers

Loan Growth 12% 15%

NIM 3% 6%

Size of Account Bigger Smaller

Current Position in the Market

Rank 1 :Market Share 29.46 %

Rank 4 :Market Share 15.81%

Compatibility with Core Competency

Key:- Full Range of Services- Customer Relationship

Key:- Physical Accessibility

K-Bank: Low number of Branches

Target Selection

Recommendation I

K-Bank: • High Range of Product and Services• Customer Care



SMEWinning Strategy

Recommendation I


Product/ServiceQuality

Enhancement

Distribution Channels

MarketingCommunication

Innovative

Personalized

Product + Service Features

+ “Alternative” Channelalong with Traditional Branches

ImplementationE-Channel

Use of

• Data Collection • Customer Concentration

Human Resource

Information Technology

I. SME Winning Strategy

Loan&

Fee Products

CRM

First Mover in terms of Financial Product Offering

Catering toSpecific Business Needs

Capitalize on our technological know-how and innovativeness Match with KBank’s Lesser Number of Branches

Recommendation I


ImplementationTailored Package for:- Production- Retail- Wholesales- Service




Enhancement


+

Communication Strategies

Recent Campaign : K Heroes

Objective:Raising the Awareness of KBank as a Modern Bank Providing High-Tech with High-Touch service

Target Audience: General Consumers

Our Proposing Campaign…

“Tailored Communication Message” Target Audience: Existing and Potential SME

Operators

Recommendation I




Communication Strategies

Our Proposing Campaign…“Tailored Communication Message”

K-Answer : Your Ultimate Solution

Professional + Personal Consultant

Recommendation I



Enhancement


+

Target Audience: Existing and Potential SME Operators


Synergy Formulation Strategy

Recommendation II

Enhancing Collaboration Among Subsidiaries


Educate Employees about Functions and Operations of Each Subsidiary Pathway to Smooth Coordination


II. Synergy Formulation Strategy

Strengthening the Common Goal ofBeing a Complete Financial Solution

Collaborative Process Enhancement

Recommendation II

Informational Flow Promoting Information Sharing

Strong Leadership andSupporting Management

Implementation:

HRM: “Knowledge Building Workgroup”


•Promotion PackageImplementation Tactics:• Product Bundling• Cross – Selling

•Physical DistributionIncrease Availability of all Subsidiaries in Majority of Branches


Customer Reach Out

Collaborative Process Enhancement

Recommendation IIII. Synergy Formulation Strategy


2006 2007 2008 2009 2010 2011Activities

Setting Up Fully-Functional & Develop new products

Collaboration and Leadership

Customer Reachout

• Increase Availability

• Promotional Package


SME Winning Strategy

Features R&D

E-Channel Promotion

CRM

K-Answer Campaign

Prepare & Testing Communicate to customers

Data Mining Training Offers high quality services to customers

Preparation Launch Follow-up

Internal Communication and Training

Expand subsidiaries presence

Package Design Bundling and Cross-selling

Timeline


2005 2006F 2007F 2008F 2009F 2010F

Total Revenue Projections (Bn) 50.37 54.86 60.11 66.14 73.63 81.59

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2005 2006F 2007F 2008F 2009F 2010F

Total Growth = 62%Total Growth = 62%

CAGR = 10.13%CAGR = 10.13%

Strengthen position in SMEs segmentStrengthen position in SMEs segment

Strong synergy among operationsStrong synergy among operations

Financial Justification


0

5,000

10,000

15,000

20,000

25,000

2005 2006F 2007F 2008F 2009F 2010F

2005 2006F 2007F 2008F 2009F 2010F

Net Income Projections (Bn) 13.93 13.94 15.22 16.29 18.33 21.53

Total Growth = 55%Total Growth = 55%

CAGR = 9.10%CAGR = 9.10%



ExpensesProduct/Service Quality Enhancement

Research and Development 100-200M / Year

CRM Cost 200-300M / Year

K-Answer Campaign 200-400M / Year

E-channel Promotion 60-100M / Year


Promote internal communication and training 100-200M / Year

Customer Reach-out Campaign 100-250M/ Year

Total Expense 660-1150 Mb /Year

Capital ExpenditureIncrease in PPE needed to support the growth

ie. Increase in Branches

Infrastructure Improvement

Information system upgrade

ETC.

Total Capital Expenditure in the next 5 years

48.76 Billions Baht



Financing Option

• 67.73 BnB from Long-Term Obligations

• 30 BnB from Short-term debt instrument

• The rest can be financed with internal generated fund

Return on Investment

• NPV = 35.14 BnB

• PI = 1.96

• PBP = 2.86 Years



Key Success Factor

TargetSelection

CustomerOrientation

CollaborationAmong

Subsidiaries


StrategiesIssues

StrengtheningCollaborationAmong Subsidiaries

CollaborationProcess

Enhancement

Synergy CollaborationStrategy

SME WinningStrategy

Target Selection

Objectives

Maintain Leadership Position in the Banking Industry

Create & RealizeSynergy andBecome TrulyUniversal Bank

Intense Competition

Customer Reach

Issues are Solved…

To Maintain the Leadership Position in terms of Size and Market Share in Thai Banking Industry Amid the Intense

Competition


Thank you

Q&A Session


Slides Navigator

• Company Profile• Situation Analysis

– Timeline– Customer Breakdown

• Issue• Recommendation I

– Target Selection– Table: SME VS End consumer– SME Winning Strategy (Produc

t)– SME Winning Strategy (Market

ing)• Recommendation II

– Synergy Formulation Strategy– Customer Reach out

• Timeline• Financial Justification

– Revenue Growth– Net Income Growth– Cost Estimation– Return on Investment

• Key Success Factor• Conclusions


Back Up NavigatorIssues ITarget Selection• Why not Select Corporate?SME Winning Strategy• SME Innovative and Personalize• Why not relied on Physical Branch

es?• Alternative “E-Branch”• E-banking • K-Answer• K-answer contradict current positi

on or not?• Why SME? • Pricing for SME • Competitive Analysis For SME

Sector

Issue II Synergy formulation

• Increasing Availability of 5 subsidiaries in KBank

• How can collaboration leading to becoming truly universal...

• Cross selling• Product Bundling


Finance Navigator

• Loan Growth Justification • Loan Growth Quantification • Non-Interest income growth Justifi

cation

• Deposit growth Justification • Balance Sheet/1, /2 • Income Statement/1, /2 • Fee Income Breakdown – 2005 • Assumptions • Ratios • Cost Estimation Justification • Financing Options Justification • Return on Investment Justification • Revenue Breakdown – KBANK

Historical

• S W O T• Competitive Analysis• Porter’s 5 Forces

• Fee income strategy for Retail Segment

• Are we not concerning Fee income for End consumer?

• Why not emphasized on fee income despite slow economic ex...

• High Cost-Income Ratio

• Merging opportunity• International Opportunity

• How can loan mix represent the whole revenue structure?

• Situation Analysis

Misc.


Strengths

• Local knowledge over foreign competitors• Financial position: high margin (NIM)• Qualified human resources• Good management (Asia’s Best Management Company)• Innovative (first Thai bank that offer full financial services)• Lowest NPL compared top 5 bank: good selection and management of loan

customer


Weaknesses

• Low number of branches• High operating expense (cost to income ratio)• Low customers’ confidence in terms of well establishment• No distinctive competency


Opportunities

• Increase penetration to household consumers• Increase accessibility to customers in rural areas• Merger & Acquisitions with international/local banks• Growth in fee income• Insurance service• International Expansion


Threats

• FTA with the U.S. intense competition from foreign banks• Increase competition from smaller banks because of mergers and

acquisitions trend, specialized financial institutions, and non-financial institutions

• Competition from• Rising oil price• Increased interest rates slow down investment rates• Being in Banking industry makes it volatile to changes in

government regulations


Competitive AnalysisBBL Krung Thai

BankSCB KBank Thai Military

BankInternational Bank

Competitive Advantage

•Brand power •Transaction infrastructure

•Retail banking process

•Range of Product and services• Modern Technology

• N/A •Economies of scale•Reputation•Multinational co. as customers

NPL 10.9% 10.9% 9.3% 8.9% 12.1% N/A

Customer focus

Corporate SME

SME Corporate

Individual SME SME &Individual N/A

Total Asset 1.4 trillion baht 1.2 trillion baht 0.93 trillion 0.89 trillion 0.73 trillion N/A

Revenue (31/12/2005)

75,045.24 million baht





N/A

Position Long Establishment

Convenient & Trendy

Modern Modern (Innovative)

N/A N/A

Revenue growth

9.89% 4.57% 0.78% 11.69% 43.32% N/A


Porter’s 5 ForcesThreat of Substitute Products

High: the industry is very competitive, everyone is always trying to come up with new and innovative products

Customers Bargaining Power

Corporate: high SMEs: lowRetail: low

Rivalry among Competing SellersHigh: from top5 Thai banks, smaller banks that are reducing in numbers but increasing in size from merger &acquisitions trend, specialized financial institutions, non-financial institutions, and foreign banks

SupplierBargaining Power

Low: from the companies that we outsource from such as IT providers company

Threat of New EntrantsLocal: low because of rules & regulations, capital intensive businessForeign: high in the future when there’s a full liberalization


Fee income strategy for Retail Segment

• Product offering – Credit card – ATM

• Offer cross selling and product bundling• Promotion

– PR – Marketing Event

• Distribution channel– Set up boot at department store for credit card application


SME Innovative and Personalize

• Innovative – be the first to offer financial products that are not yet served in Thailand i.e. Money market mutual fund

• Personalize– Based on type of business

• Production• Retail• Wholesale• Service

– Provides Personal consultant• Experience on each industry• Provides guidance for new SME

– Call center • 24 hours service providers


Why not relied on Physical Branches?

• Customer relationship management is the main point in drawing SME into selecting the banking

• KBank is weaker in term of number of branches– Rank 4th out of the top 5

• Create high expense in opening new branches


Alternative “E-Branch”

• We are not neglecting the physical branch the E-Branch would serve as an alternative marketing channel to provide:– Convenient– Accessibility – Personalization– Information flow

• And to best serve our customers.


E-banking

• Provides as an alternative channel of Payment • For better service coverage in response to the growing

demand• Continue to upgrade product and service

• E- Banking Channel– Internet– Phone– ATM


High Cost-Income Ratio

• Even though the cost-income ratio is higher than other top 5 banks

• The reason is due to it high fee and services expenses which grows as the fee and service income grows

• KBank has high fee and service income percentage compared to other top5 banks

• Therefore, it is not necessary that the high cost-income ratio of KBank stems from inefficiency problem


Why not Select Corporate?

• High Bargaining Power and price sensitive• Low Growth (4% IN 2004)• Low NIM (2% IN 2004)• Corporate usually choose bank through:

– Price – Relationship

• KBank is also far behind in terms of the market share between the top 5 banks.


K-Answer

• Target customer: SME • Communication message provide Professional and

Personal consultant• Communication channel

– Mass media• TV• Radio

– Road show i.e. at the SMEs Fair – Organize a Seminar also the way to gain more

awareness through PR


K-answer contradict current position or not?

• No, It will not come in contradiction• Current position – modern and innovative• K-Answer still maintain the modern and innovative position • Also suit with the concept of the overall objective

– “K Excellence”


Cross selling• The strategy of pushing new products to current customers based on their

past purchases – thus the product is personalized

• Cross-selling is designed to widen the customer's reliance on the company and decrease the likelihood of the customer switching to a competitor.

• The key step consists of – Knowing your products– Knowing your customers– Asking questions and listen for clues– Assessing customers' needs and propose only appropriate products, and– Treating the sale as a suggestion, that way clients will feel comfortable about

volunteering the information and it is easy for the customer to accept the offer

i.e. Cross –sell KBANK with KASSET


Product Bundling

• Offering several product for sale as one combined product• Different from cross-selling because it is not personalized to

each customer but already designed before hand

i.e. Matching: KBANK with KLICENSING


Are we not concerning Fee income for End consumer?

• No we are still offering services to end consumer but we believe that SME is the right target at the moment

• According to the case, product that will boost the fee income consists of:– Under writing – L/C fee – Foreign Exchange– Trade finance transaction

• These are all business source• Fee income from end consumers account for only 20% of total fee

income


Merging opportunity

• Despite the trend of M&A in the industry – it is not feasible for KBank to merge with anyone due to

– No viable target exist– The risk of unfit corporate cultures


How can loan mix represent the whole revenue structure?

• Loan Mix tell us who are each customer segment and in what proportion they account for

• We should be able to assume the loan mix of customer proportion to be the same for customers for other products

• Because – Loan represent main source of income for banks (63%)– The customers that lend money from the banks should do

other activities at the same proportion


Why SME?

• In 2004 • All business consists of

2,166,621• SME consists of 2,161,577• Consists of 99.8% of all

businesses in Thailand • Growth rate 8 %

1900

1950

2000

2050

2100

2150

2200

2003 2004

Total Business

SME

In thousand

Source: http://www.sme.go.th


Why not emphasized on fee income despite slow economic expansion?

Industry Ratio 2003 2004 2005

Net Interest income growth 12% 13% 43%

Fee income growth 3% 10% 15%

% of fee income to total income 25% 24% 20%

NPL 12.87% 10.92% 8.29%

LDR 87% 91% 90%

NIM 2.11% 2.64% 2.85%

• Fee income is not that attractive•Less growth compared to net interest income•Loan has become more interesting during the past few years

•NPL decreased loan quality improved significantly•LDR constant (at lower than 1) Loan<Deposit meaning that the competition for deposit to finance loan should not be high margin of loan won’t be decreased•NIM increase makes loan more attractive than before

• Expect this to be a short term thing• Due to current political instability • GDP has been growing for the past 5 years• Can expect elastic demand for oil price in the future expect drop in price


Pricing for SME

• WILL NOT focus on competitive pricing• Rationales:

– SME has lower bargaining power compared to large corporations

– We will emphasize on other value added competitive features e.g. personalized services, consulting services, call center, etc.

• Therefore, with full range of product offering, KBank will not have to focus on competitive pricing


Competitive Analysis For SME Sector

• Bangkok Bank – same product offering– Strength: long establishment good reputation

Higher total asset high capital budget

• SME Bank – More specialize with competitive price but do not offer full range of service


International Opportunity

• We have plan to expand internationally but it’s still not our main focus in this presentation because there are still other issues that needed to be taken care of in a short run

• Proposing Long Term Plan to Expand Internationally1st STEP: Enhance on exiting countries KBank already has branches in

• Los Angeles, Hong Kong, Cayman Island, Shenzhen

2nd STEP: Expand to other countries– Criteria : Existing customer of KBank Often visit that country

Country’s GDP– Possible Location:

• Major cities of US • Japan• China

• Product Focus: Initial stage Fee Products


Increasing Availability of 5 subsidiaries in KBank

• We are unable to obtain information about existing presence of K-subsidiaries in KBank (in how many and which branches)

• According to the case writer, K-subsidiaries only exist in a few large KBank branches

• Therefore, our goal is to increase presence of K-subsidiaries in the majority of KBank branches

• Criteria:– Revenue exceed certain level– Number of Customers

• Doesn’t have to integrate all K’s at the same time – may do it one by one – but need to start


How can collaboration leading to becoming truly universal bank?

• Collaboration would make all subsidiaries work together very well – as if it is one company

• Ultimately, it will allow the customers to stop at any of the KBank branches and be served with the service of all subsidiaries under KGroup

• Thus, KGroup would become a “truly Universal Bank”


How can we evaluate the success of synergy realization?

• Measure the success by– Percentage Income from cross-selling and product bundling– Reduce in communication errors between business units


Loan Growth Justification

• Loan income is a major part in the bank revenue. (63% in 2005)• The growth component is calculated from 2 factors. The market growth and the market share of the KBANK.• The growth of the market is forecasted in the case at 12%, 15%, 4% for SMEs, Consumer and Corporate segment respectively.• This is the market share projection for KBANK

Market Share - Loan

SMEs29.46

% 30% 31% 32% 33% 34%

Consumer15.82

% 15.82%15.82

%15.82

%15.82

%15.82

%

Corporate12.22

% 12%11.50

% 11% 11%10.50

%• With the above information, we forecast the loan portion of income fairly accurately.


Loan Growth Quantification

2005 2006F 2007F 2008F 2009F 2010FLoan market growthSMEs 12% 12% 12% 12% 12% 12%Consumer 15% 15% 15% 15% 15% 15%Corporate 4% 4% 4% 4% 4% 4%

Total Market (in 5 banks)SMEs 60,116 67,329 75,409 84,458 94,593 105,944Consumer 29,998 34,498 39,673 45,624 52,467 60,337Corporate 75,072 78,075 81,198 84,446 87,823 91,336Total Market (in 5 banks) 165,186 179,902 196,279 214,527 234,884 257,618

Market Share - LoanSMEs 29.46% 30% 31% 32% 33% 34%Consumer 15.82% 15.82% 15.82% 15.82% 15.82% 15.82%Corporate 12.22% 12% 11.50% 11% 11% 10.50%

Loan IncomeSMEs 17,712 20,199 23,377 27,027 31,216 36,021Consumer 4,744 5,458 6,276 7,218 8,300 9,545Corporate 9,172 9,369 9,338 9,289 9,661 9,590Total 31,628 35,025 38,991 43,533 49,177 55,157

Loan Yield 5.04% 5.04% 5.04% 5.04% 5.04% 5.04%

Loan AmountSMEs 184,698 188,084 194,353 200,623 206,892 213,162Consumer 99,183 99,183 99,183 99,183 99,183 99,183Corporate 76,613 75,234 72,099 68,964 68,964 65,829Total 626,946 693,572 769,048 855,270 971,869 1,092,212


Non-Interest income growth Justification

• Since, we’re targeting SMEs, and our position is to be a full-one stop service, therefore, it is highly probable that our customer will use more than one of our services.• So we believe it is logical for us to forecast the growth in none-income item to grow along side with our loan portion of our income, and at a slightly faster rate due to the smaller denominator.


Deposit growth Justification

• Since we do not have a strategy that focus on increasing the deposits, we have forecast it to grow along with the GDP.• However, in the next few years it is expected to grow faster because it is negatively correlated to the overall economic condition.• The cost of deposit will also grows as well as more banks compete for the deposits (but not really a big change)


Balance Sheet/1

2004 2005 2006F 2007F 2008F 2009F 2010FAssetsCash 13,536 14,913 16,244 17,798 19,583 3,799 9,157Interbank and money market items

Domestic itemsInterest bearing 1,218 4,926 4,926 4,926 4,926 4,926 4,926Non-interest bearing 2,135 1,709 1,709 1,709 1,709 1,709 1,709

Foreign itemsInterest bearing 71,969 58,795 58,795 58,795 58,795 58,795 58,795Non-interest bearing 927 499 499 499 499 499 499

Total Interbank and Money Market Items - net 76,249 65,929 65,929 65,929 65,929 65,929 65,929Securities purchased under resale agreements 19,040 9,500 9,500 9,500 9,500 9,500 9,500Investments

Current investments - net 33,325 50,105 50,105 50,105 50,105 50,105 50,105Long-term investments - net 76,770 49,009 49,009 49,009 49,009 49,009 49,009Investments in subsidiaries and associated companies - net 462 450 450 450 450 450 450

Total Investments - net 110,557 99,564 99,564 99,564 99,564 99,564 99,564Loans and accrued interest receivables

Loans 592,588 626,946 693,572 769,048 855,270 971,869 1,092,212Accrued interest receivables 2,455 1,745 1,930 2,141 2,381 2,705 3,040

Total Loans and Accrued Interest Receivables 595,043 628,691 695,502 771,189 857,651 974,574 1,095,252Less Allowance for doubtful accounts -41,465 -34,766 -38,568 -42,765 -47,559 -54,043 -60,735 Less Revaluation allowance for debt restructuring -4,878 -2,672 -2,672 -2,672 -2,672 -2,672 -2,672

Total Loans and Accrued Interest Receivables - net 548,700 591,253 654,263 725,752 807,419 917,859 1,031,845Properties foreclosed - net 17,397 17,463 17,463 17,463 17,463 17,463 17,463Customers’ liability under acceptances 743 857 857 857 857 857 857Premises and equipment - net 19,747 21,440 30,359 34,544 45,045 53,279 53,830Intangible assets - net 3,523 4,900 4,900 4,900 4,900 4,900 4,900Derivative revaluation 6,349 3,278 3,278 3,278 3,278 3,278 3,278Other assets - net 9,133 8,211 8,211 8,211 8,211 8,211 8,211

Total Assets 824,974 837,308 910,567 987,797 1,081,749 1,184,639 1,304,534


Balance Sheet/2Liabilities and Shareholders’ EquityDeposits

Deposits in baht 701,713 684,056 725,099 775,856 834,046 900,769 968,327Deposits in foreign currencies 3,856 3,725 3,725 3,725 3,725 3,725 3,725

Total Deposits 705,569 687,781 728,824 779,581 837,771 904,494 972,052Interbank and money market items

Domestic itemsInterest bearing 8,068 15,681 15,681 15,681 15,681 15,681 15,681Non-interest bearing 3,183 3,385 3,385 3,385 3,385 3,385 3,385

Foreign itemsInterest bearing 19 152 152 152 152 152 152Non-interest bearing 256 290 290 290 290 290 290

Total Interbank and Money Market Items 11,526 19,508 19,508 19,508 19,508 19,508 19,508Liability payable on demand 7,426 5,904 5,904 5,904 5,904 5,904 5,904Borrowings

Short-term borrowings 3,843 7,557 13,371 16,298 21,706 22,893 37,473Long-term borrowings 19,768 20,170 32,634 40,964 55,028 71,681 87,903

Total Borrowings 23,611 27,727 46,005 57,262 76,734 94,574 125,376Bank’s liability under acceptances 743 857 857 857 857 857 857Derivative revaluation 1,441 3,034 3,034 3,034 3,034 3,034 3,034Other liabilities 7,993 14,381 14,381 14,381 14,381 14,381 14,381

Total Liabilities 758,309 759,192 818,513 880,527 958,189 1,042,752 1,141,112Shareholders’ equity

Share capital Issued and paid-up share capital

ordinary shares, Baht 10 par value 23,636 23,733 23,733 23,733 23,733 23,733 23,733Premium on ordinary shares 17,555 17,737 17,737 17,737 17,737 17,737 17,737Appraisal surplus on asset revaluation 8,762 10,024 10,024 10,024 10,024 10,024 10,024Revaluation (deficit) on investments 952 -529 -529 -529 -529 -529 -529 Retained earnings

AppropriatedLegal reserve 770 1,470 1,470 1,470 1,470 1,470 1,470

Unappropriated 14,672 25,679 39,617 54,833 71,123 89,450 110,985Shareholders’ equity before minority interest. 66,347 78,114 92,052 107,268 123,558 141,885 163,420

Minority interests 318 2 2 2 2 2 2Total Shareholders’ Equity 66,665 78,116 92,054 107,270 123,560 141,887 163,422Total Liabilities and Shareholders’ Equity 824,974 837,308 910,567 987,797 1,081,749 1,184,640 1,304,534


Income Statement/1

2004 2005 2006F 2007F 2008F 2009F 2010FInterest and dividend income

Loans 27,712 31,628 35,025 38,991 43,533 49,177 55,157Interbank and money market items 1,527 2,387 2,387 2,387 2,387 2,387 2,387Investments 3,760 4,051 4,051 4,051 4,051 4,051 4,051

Total Interest and Dividend Income 32,999 38,066 41,463 45,429 49,971 55,615 61,595Interest expense

Deposits 5,548 5,703 6,012 6,517 7,089 7,747 8,328Interbank and money market items 230 387 387 387 387 387 387Short-term borrowings 5 59 104 127 169 179 292Long-term borrowings 1,250 1,134 1,834 2,302 3,093 4,028 4,940

Total Interest Expense 7,033 7,283 8,338 9,333 10,738 12,341 13,947Net income from interest and dividends 25,966 30,783 33,126 36,095 39,233 43,274 47,648Bad debt and doubtful accounts (reversal) -6,159 599 665 737 819 931 1,046Loss on debt restructuring 8,919 3,063 3,063 3,063 3,063 3,063 3,063Net income from interest and dividends after bad debt and

doubtful accounts (reversal) and loss on debt restructuring 23,206 27,121 29,398 32,295 35,351 39,280 43,538Non-interest income

Gain on investments 2,143 427 427 427 427 427 427Share of profit (loss) from investments on equity method 82 -35 -35 -35 -35 -35 -35 Fees and service income

Acceptances, aval and guarantees 577 685 765 860 969 1,104 1,249Others 7,530 8,656 9,672 10,864 12,238 13,947 15,783

Gain on exchanges 1,806 1,129 1,129 1,129 1,129 1,129 1,129Loss on transfer of financial assets -569 Other income 580 1,440 1,440 1,440 1,440 1,440 1,440

Total Non-interest Income 12,149 12,302 13,399 14,685 16,168 18,012 19,993


Income Statement/2

Non-interest expensesPersonnel expenses 6,564 7,841 8,541 9,358 10,296 11,462 12,701Premises and equipment expenses 3,814 3,525 4,991 5,680 7,406 8,760 8,850Taxes and duties 1,386 1,677 1,827 2,001 2,202 2,451 2,716Fees and service expenses 3,210 2,968 3,316 3,725 4,196 4,782 5,412Directors’ remuneration 55 72 72 72 72 72 72Loss on impairment of properties foreclosed 705 201 201 201 201 201 201Incremental Recommendation Expense 700 1,150 970 770 660Contributions to Financial Institutions Development Fund 2,802 2,826 2,826 2,826 2,826 2,826 2,826Other expenses 1,311 2,316 2,316 2,316 2,316 2,316 2,316

Total Non-interest Expenses 19,847 21,426 24,790 27,329 30,486 33,640 35,755Income before income tax 15,508 17,997 18,007 19,651 21,033 23,652 27,777Income tax expense 116 4,003 4,005 4,371 4,678 5,261 6,178Net income before minority interests 15,392 13,994 14,002 15,280 16,355 18,391 21,598Minority interests in net income -52 -64 -64 -64 -64 -64 -64 Net income 15,340 13,930 13,938 15,216 16,291 18,327 21,534


Fee Income Breakdown - 2005

Gain (Loss) on foreign exchanges 8442 10.93%Money Transfers and Collection 8420 10.91%ATM Cards and other e-banking service 7593 9.83%Credit cards 7246 9.38%Acceptances, aval, and guarantees 3252 4.21%Management fee 3040 3.94%Letters of credits 2082 2.70%Cheque-related fee 1239 1.60%Underwriting 693 0.90%Consultancy 420 0.54%Securities custodian 414 0.54%Other fee and services 8561 11.09%Other non-interest incomes 25809 33.43%Total Non-Interest income 77212

• The items that directly related to end consumers are ATM and Credit Cards. Which contribute about 20% of the total fee income• The other items excluding others, are mostly stem from business services (accounted for about 36%).


Assumptions

2005 2006F 2007F 2008F 2009F 2010FTotal Income 50,368 54,862 60,114 66,139 73,627 81,588Loan Growth - 8.92% 9.57% 10.02% 11.32% 10.81%Loan Yield 5.04% 5.04% 5.04% 5.04% 5.04% 5.04%Deposit Growth 5% 6% 7% 7.50% 8% 7.50%Deposit Cost 0.83% 0.84% 0.85% 0.86% 0.86% 0.85%Doubtful Expenses to Allowance Ratio 1.72% 1.72% 1.72% 1.72% 1.72% 1.72%Growth in fee and service income - 11.74% 12.32% 12.65% 13.96% 13.16%Personal Expense to Sales 15.57% 15.57% 15.57% 15.57% 15.57% 15.57%Premise and Equipment expense 16.44% 16.44% 16.44% 16.44% 16.44% 16.44%Taxes and Duty to Total Income 3.33% 3.33% 3.33% 3.33% 3.33% 3.33%Fee and Services expenses to Fee and service income 31.77% 31.77% 31.77% 31.77% 31.77% 31.77%Tax Rate 22.24% 22.24% 22.24% 22.24% 22.24% 22.24%

Cash to total income 29.61% 29.61% 29.61% 29.61% 5.16% 11.22%Interest Receivable to loan 0.28% 0.28% 0.28% 0.28% 0.28% 0.28%Allowance of doubtful account to loan -5.55% -5.56% -5.56% -5.56% -5.56% -5.56%Premises to total income 42.57% 55.34% 57.47% 68.11% 72.36% 65.98%Interbank and money market item liabilities 29.59% 29.59% 29.59% 29.59% 29.59% 29.59%Depreciation 7.54% 7.54% 7.54% 7.54% 7.54% 7.54%

LT Loan rate 5.62% 5.62% 5.62% 5.62% 5.62% 5.62%ST Loan rate 0.78% 0.78% 0.78% 0.78% 0.78% 0.78%


Ratios

2004 2005 2006F 2007F 2008F 2009F 2010FLiquidity Ratio

Liquid asset to deposit 0.20 0.21 0.20 0.19 0.18 0.15 0.14Loan to Deposit 77.77% 85.97% 89.77% 93.10% 96.38% 101.48% 106.15%

Profitability RatioNet Interest Margin 2.90% 3.38% 3.38% 3.38% 3.38% 3.38% 3.38%Funding cost 0.96% 1.02% 1.08% 1.12% 1.17% 1.24% 1.27%Deposit Cost 0.79% 0.83% 0.82% 0.84% 0.85% 0.86% 0.86%Asset Yield 4.49% 5.03% 5.06% 5.10% 5.14% 5.13% 5.14%ROE 23.01% 17.83% 15.14% 14.18% 13.18% 12.92% 13.18%ROA 1.86% 1.66% 1.53% 1.54% 1.51% 1.55% 1.65%


Cost Estimation Justification

• The capital expense items are quite difficult to trace back directly to our recommendations, but they’re required to support the growth resulting from our recommendation none the less.• This is the expenses item that are in different amount depending on which phase they’re on (in Millions of Baht)

Product/ Enhancement 2006 2007 2008 2009 2010Research & Development 200 150 100 100 100CRM 300 250 200 200 200K-Answer Campaign 300 400 300 200E-channel 100 70 70 60SynergyPromote internal communication and training 200 100Customer Reachout Campaign 250 200 100 100

Total Expense 700 1150 970 770 660


Financing Options Justification

2006 2007 2008 2009 201012,464 8,330 14,064 16,653 16,222

• In order to support the capital expense and the on-going operation, external financing is needed.

• Long-Term obligation • Not just long-term debt, also include hire-purchase contract, leasing contract, etc.• Used mainly to financed the capital expenditure.• Borrowing timing:

• Short – Term Debt Instrument• Used mainly for short-term financing of the asset to carry on the normal operation• Borrowing Timing:

2006 2007 2008 2009 20105,814 2,927 5,408 1,187 14,580


Return on Investment Justification

• Estimated WACC = 11.09%• Inflows & Outflows

Inflows (Net Income) 15,214 16,921 19,430 22,537 25,823Outflow (CAPEX) 11,209 6,791 13,898 12,252 4,611

• PV of Inflows = 71,647 Mn B• PV of Outflows = 36,503 Mn B• NPV = 35,144 MnB• Profitability Index = 1.96• Pay back Period = 2.86 Years


Revenue Breakdown – KBANK Historical

2005 % 2004 %Interest and dividend income 38,066 75.58% 32,999 73.09%1. Loans 31,628 62.79% 27,712 61.38%2. Interbank and MMI 2,387 4.74% 1,527 3.38%3. Investments 4,051 8.04% 3,760 8.33%Non-Interest Income 12,302 24.42% 12,149 26.91%1. Fee and Service Income 9,342 18.55% 8,108 17.96%2. Gains on Exchange 1,129 2.24% 1,806 4.00%3. Other Income 1,831 3.64% 2,235 4.95%Total Income 50,368 45,148


Intense Competition

1997 20061998 2000

BOT’s “Financial Master Plan”(FMP)

Allow 100% ownership of foreign financial institution in Thai banks

NPL s decreased to 8.29%



Banks: Declining in Number but Increasing in SizeMajor Thai Banks: Currently Offering Full Ranges of Financial Services


Superior Financial Strength and Economy

of Scale

IntenseCompetition

IntenseCompetition


Corporate45.45%

Customer Characteristics

SME 36.39%

End consumer18.16%

• Low growth• Low NIM• Price sensitive• Relationship oriented

• High growth• High NIM• Requires physical accessibility

• Medium growth• Medium NIM

@kbank final

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