Kiatnakin Phatra Bank Public : Management Discussion and Analysis Half Year Ending 30 Jun 2022

Management Discussion and Analysis

For the second quarter and six-month ended June 30, 2022 (Unaudited)

Kiatnakin Phatra Bank Public Company Limited

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Website: www.kkpfg.com

Overall Business Operations

For 2Q22, the Bank continued to deliver solid performance with the consolidated net profit of the Bank and subsidiaries at Baht 2,033 million, an increase of 50.1% comparing to 2Q21 while comprehensive income totaled Baht 1,827 million, increase of 1.1% YoY. The increase continued to be driven by strong performance from the Commercial Banking Business with increase in both interest income and fee income generated from the credit business while provisioning expense declined as a result of manageable asset quality. For the first half of 2022, the consolidated net profit totaled Baht 4,089 million, an increase of 45.1% comparing to the same period last year with comprehensive income totaled Baht 3,781 million, increasing 13.3% YoY.

Net interest income for 2Q22 rose by 18.0% YoY from continued loan expansions in high quality assets with YTD loan growth as of the end of 2Q22 at 9.7%. Meanwhile, non-interest income declined as a results of uncertainties in the capital market with Kiatnakin Phatra Securities's market share1 continued to rank at the number one position with market share of 18.18%.

Overall operating expenses continued to be efficiently managed, resulting in cost to income ratio2 for 2Q22 at 40.9%. For provisions, the Bank remained prudent when considering the level of provisions taking into account the continuing uncertainties and recorded total expected credit losses amount for 2Q22 at Baht 812 million, lowered when comparing to amount for 2Q21, reflecting manageable asset quality with total allowance for expected credit losses to total NPLs ratio (coverage ratio) remaining at a high level of 169.1%. The Non-Performing Loans (NPLs) to total loans ratio for 2Q22 was at 3.0%3, remaining at stable level from the end of 2021.

The Bank current level of capital remains strong and is above the minimum requirement by the Bank of Thailand with the capital adequacy ratio of the Bank as of the end of 2Q22 at 15.39%.

Overall market environment

The Thai economy in 2Q22 recovered at a faster pace compared to 1Q22, especially for domestic economy, from the easing concerns over COVID-19 outbreak. With the lifting of international travel restrictions, the tourism industry started to improve. Private consumption and investment showed a sign of recovery during 2Q22 following the improving COVID-19 outbreak situation. However, the rising inflation would limit the consumption recovery in the second half of 2022. Meanwhile, on the external front, exports started to show a sign of slowdown with expansion continuing at a slower rate with growth driven by Thailand's major trade partners' income amid rising concern over recession risk. In the first 5 months of the year, exports expanded by 23.2% YoY due mainly to agricultural and oil-related products. The number of tourist arrivals for the first 5 months of 2022 increased to 1,312,500 compared to 20,000 for the same period in 2021.

The rapid surge in oil price and global inflation results in the faster tightening monetary policy cycle, led by the Federal Reserve. For Thailand, 2Q22 inflation increased significantly to 6.47%. The Bank of Thailand has expressed concern over inflationary pressure. With the pressure from baht depreciation caused by widening interest rate differential between Thai and the US, we expect the Bank of Thailand would raise the policy rate to 1.50% by end of 2022.

In 2022, the recovery of the Thai economy is expected to be fragile and uneven across sectors and geography. The tourism industry is likely to remain weak as only 6.1 million tourist arrivals are anticipated for 2022, still much lower than the pre-crisis of around 40 million people per year. However, domestic economic recovery is expected to resume given that the outbreak of COVID-19 local infections does not prolong and no national

1. Including SET and mai but excluding proprietary trading
2. Operating expenses excluding items relating to foreclosed assets (loss from revaluation of foreclosed assets and loss from sale of foreclosed assets)
3. Excluding loans classified as Purchased or originated credit-impaired financial assets (POCI)

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lockdown measures are imposed. Thailand's export growth in 2022 is projected to grow at a lower rate as global demand showed a sign of slowdown. The key risks to the global economy included the higher-than-expected inflation, the monetary policy tightening and the risk from escalating Russia-Ukraine conflict.

The auto industry started to recover in 2022. The total number of car sales for the first 5 months of 2022 rose by 16.6% YoY, with the passenger vehicle segment and the commercial vehicle segment expanding by 18.9% and 15.5% YoY, respectively. The recovery was consistent with the expected improving economic conditions in 2022 as well as pent-up demand for car.

In the equity market, the average daily turnover (SET and mai) for 2Q22 declined by 19.3% from Baht 96,240 million in 1Q22 to Baht 77,663 million in 2Q22. The SET index at the end of 2Q22 closed at 1,568.33 points, declining by 7.5% from 1,695.24 points at the end of 1Q22.

Operating results of the Bank and subsidiaries for 2Q22 and for the first half of 2022

Unit : Baht million	2Q22	1Q22	% QoQ	2Q21	% YoY	1H22	1H21	% YoY
Net Interest income	4,475	4,304	4.0	3,794	18.0	8,779	7,624	15.1
Non-interest income	1,672	2,137	(21.8)	1,941	(13.9)	3,809	3,726	2.2
Total operating income	6,147	6,441	(4.6)	5,735	7.2	12,589	11,351	10.9
Total other operating expenses	2,818	2,793	0.9	2,678	5.2	5,611	5,261	6.7

Expected credit losses

Profit from operating before income tax expenses

Income tax expenses

Net Profit (attributable to equity holders of the Bank)

Total Comprehensive income (attributable to equity holders of the Bank)

Realized gain (loss) on sale of equity instruments designated at fair value through other comprehensive income

812	1,066	(23.8)	1,378	(41.0)	1,878	2,612	(28.1)
2,517	2,582	(2.5)	1,680	49.8	5,099	3,477	46.6
481	521	(7.6)	322	49.5	1,002	627	59.8
2,033	2,055	(1.1)	1,354	50.1	4,089	2,817	45.1
1,827	1,954	(6.5)	1,807	1.1	3,781	3,338	13.3
(4)	55	(107.1)	38	(110.2)	52	(62)	(182.5)

Basic earnings per share (Baht)	2.40	2.43	(1.2)	1.60	50.0	4.83	3.33	45.0

For 2Q22, the consolidated net profit totaled Baht 2,033 million, an increase of 50.1% from 2Q21 of which Baht 206 million was the net profit from Capital Market business. The increase was largely driven by the performance of the Commercial Banking Business with net interest income increased of 18.0% from continued loan expansions while non-interest income declined by 13.9% YoY from both lower net fees and services income and other income as a results of the uncertainties in the capital market. Meanwhile, provisions expense for 2Q22 declined considerably YoY reflecting the Bank's manageable loan portfolio quality. The consolidated comprehensive income for 2Q22 totaled Baht 1,827 million with Capital Market business's comprehensive income at Baht 194 million.

For the first half of 2022, the consolidated net profit totaled Baht 4,089 million, an increase of 45.1% comparing to the same period last year, of which Baht 672 million was the net profit from Capital Market business with increase driven by higher net interest income of 15.1% YoY from loan expansion while non-interest income increased only slightly amid uncertainties from the capital market. For provisions, expected credit loss declined comparing to the same period last year from overall loan portfolio quality which remained at a management level. The consolidated comprehensive income for the first half of 2022 totaled Baht 3,781 million with Capital Market business's comprehensive income at Baht 664 million.

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Summary of financial performance ratios

Annualized Ratios	2Q22		1Q22	2Q21		1H22	1H21
Net Profit (Baht million)	2,033		2,055	1,354		4,089	2,817
ROAE (%)	15.4		15.8	11.3		15.7	11.9
ROE (%)	15.3		16.1	11.3		16.0	12.1
ROAA (%)	1.7		1.8	1.4		1.8	1.5
Comprehensive income (Baht million)	1,827		1,954	1,807		3,781	3,338
ROAE (%)	13.8		15.0	15.1		14.5	14.1
ROE (%)	13.8		15.3	15.0		14.8	14.4
ROAA (%)	1.5		1.7	1.8		1.6	1.8
Loan growth	2.9		6.6	4.4		9.7	6.7
NPLs/ Total loans (excluding interbank and POCI)	3.0		2.9	3.4		3.0	3.4
Allowance for expected credit losses/ Total NPLs
excluding POCI (coverage ratio)	169.1		181.2	160.1		169.1	160.1

Net Interest Income

Unit: Baht million	2Q22	1Q22	% QoQ	2Q21	% YoY	1H22	1H21	% YoY
Interest income	5,547	5,270	5.2	4,744	16.9	10,817	9,559	13.2
Interest on loans	1,989	1,944	2.3	1,842	7.9	3,932	3,697	6.4
Hire purchase and financial lease income	3,292	3,090	6.5	2,692	22.3	6,383	5,320	20.0
Interest on POCI	45	65	(31.3)	48	(7.7)	110	222	(50.6)
Interest on interbank and money market items	119	100	18.9	69	71.7	219	131	67.6
Interest on securities	97	70	38.7	90	7.9	167	186	(10.3)
Others	5	2	204.4	2	135.3	7	4	61.3

Interest expense	1,071	967	10.9	950	12.8	2,038	1,935	5.3
Interest on deposits	686	620	10.6	615	11.5	1,307	1,269	3.0
Interest on interbank and money market items	35	28	23.4	24	48.3	64	49	29.1
Interest on debt issued and borrowings	135	121	12.0	139	(2.9)	256	273	(6.5)
Fees and charges on borrowings	2	4	(35.2)	2	5.4	6	6	0.2
FIDF and DPA fees	202	185	9.3	165	22.9	387	323	19.8
Others	10	8	21.9	5	116.5	19	14	38.1
Net Interest Income	4,475	4,304	4.0	3,794	18.0	8,779	7,624	15.1

For 2Q22, net interest income amounted to Baht 4,475 million, an increase of Baht 681 million or 18.0% from Baht 3,794 million during 2Q21 driven by the increase in interest income of 16.9% from continued loan expansions of 9.7% YTD. Interest income from hire purchase and financial lease increased by 22.3% in line with the considerable growth of the hire purchase portfolio in recent periods. Meanwhile, interest expense increased by 12.8% YoY as a results of higher deposit volume while cost of funds declined YoY from the Bank effective cost management resulting in overall net interest income to increase by 18.0% YoY. Loan spread for 2Q22 remained relatively stable at 5.2% comparing to 5.3% during 2Q21.

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For the first half of 2022, net interest income totaled Baht 8,779 million, an increase of 15.1% consistent with the satisfactory growth in loan portfolio. Meanwhile, interest expenses also increased by 5.3% from higher deposit volume while cost of funds declined YoY from the Bank effective cost management. Loan spread for the first half of 2022 declined to 5.3% from 5.4% during the first half of 2021.

%	2Q22	1Q22	4Q21	3Q21	2Q21	1H22	1H21
Yield on loan	6.3	6.4	6.4	6.3	6.5	6.4	6.6
Cost of fund	1.1	1.1	1.1	1.2	1.3	1.1	1.3
Loan spread	5.2	5.3	5.3	5.2	5.3	5.3	5.4

Non-Interest Income

	Unit: Baht million	2Q22	1Q22	% QoQ	2Q21	% YoY	1H22	1H21	% YoY
Fees and services income	1,646	1,851	(11.1)	1,821	(9.6)	3,496	3,457	1.1
Fees and services expenses	249	297	(16.0)	207	20.8	546	409	33.7
Fees and services income, net	1,396	1,554	(10.1)	1,614	(13.5)	2,950	3,048	(3.2)
	Gain on financial instruments measured at	123	362	(66.1)	187	(34.3)	485	358	35.7
	fair value through profit or loss, net
Gain (loss) on investments, net	2	(14)	(112.4)	-	n.a.	(13)	(6)	106.7
Dividend income	93	200	(53.4)	96	(3.3)	293	218	34.1
Other operating income	58	36	60.5	44	32.4	95	108	(12.6)
Total Non-Interest Income	1,672	2,137	(21.8)	1,941	(13.9)	3,809	3,726	2.2

For 2Q22, non-interest income totaled Baht 1,672 million, a decline of 13.9% from 2Q21. The decline was largely driven by lower net fees and services income of 13.5% as a result of uncertainties in the capital market with fee from investment banking business continuing to slow down amid unfavorable market conditions. Meanwhile, bancassurance fee increased from loan expansions, fee income from asset management business also grew in line with asset under management which expanded YoY while fee from brokerage business also grew slightly YoY with Kiatnakin Phatra Securities maintaining the number one position in terms of market share at 18.18% for 2Q22. The Bank's other income declined driven by lower gain on financial instruments measured at fair value through profit or loss.

For the first half of 2022, non-interest income totaled Baht 3,809 million, increasing 2.2% YoY driven by higher bancassurance fee, asset management fee. The Bank's other income also increased driven by gain on financial instruments measured at fair value through profit and loss from the Equity and Derivatives Trading and Financial Markets business which performed well during the first half of 2022 comparing to the first half of 2021. Meanwhile, due to unfavorable market conditions, fee from investment banking business slowed down comparing to the same period last year.

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