Bank of Ayudhya

Bank of Ayudhya Plc (BAY)
What’s new? BAY sold NPLs with a face value of Bt2.4bn to Alpha Capital Asset Management. Bad retail loans comprised 80% of NPLs in the tranche; the balance was SME loans. The transaction represented 2.66% of BAY’s total assets at end-March 12.   
No loss incurred on deal: The bank divested the NPLs at slightly above net BV. Note that its net BV normally is discounted by 55% from fair BV. Thus, the bank’s 2Q12 earnings will not be impacted by the sale. 
Better asset quality: The sale of bad debts will reduce BAY’s NPLs by 8.6% to Bt25.7bn (from Bt28.1bn at end-March 2012). We calculate that BAY’s NPLs/loans ratio will decline to 3.3% from 3.6% at end-March, which would be close to its YE12 NPLs/loans ratio target of 3%. Furthermore, the sale will increase its loan loss coverage ratio to 116% from 114% at end-March 2012. BAY plans to sell more NPLs during 2H12 if the price is right. We have no qualms about the quality of its assets at the moment.
Action: BAY should deliver good 2Q12 earnings, supported by strong lending growth, a sustained NIM, well-managed OPEX and lower loan loss provisions. Note that BAY’s 2Q12 income statement will include a Bt400m investment gain (equal to about 12% of 1Q12 earnings) from the disposal of an 8.5% stake in Ayudhya Allianz CP Life Plc in late April 2012. As such, we expect its share price to rise in anticipation of hefty second-quarter earnings.
Currently, BAY trades at an inexpensive YE12 PBV of 1.5x, which is below both the regional bank mean of 1.7x and the Thai Bank sector average of 1.55x. Based on its strong earnings profile and scope for lending growth upside (boosted by Bt24.5bn in BOT soft funding), we maintain our BUY rating with a YE12 target price of Bt30.50, pegged to PBV at 1.63x (below its peak PBV at 2x in 2007).