Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

Event – New strategic partner. Mitsubishi UFJ Financial Group will acquire 25% in
BAY from GE Capital, according to local market daily Kao Hoon. The acquisition
price is expected to be no less than Bt36/share. Of the 25%, Mitsubishi UFJ Financial
Group will hold 15% and Mitsubishi Holding 10%.
Tender offer? If the acquisition price of no less than Bt36/share (1.9x 2012F BVPS),
as reported in the paper, is really this high, it will spur price performance. However,
we believe there is unlikely to be a full tender offer in this case due to the foreign
holding limit. There could be a partial tender offer, however.
Increased focus on corporate? Mitsubishi UFJ Financial Group is the largest bank
in Japan and its primary strength is corporate lending with only 25-30% exposure
to retail lending. This may lead BAY to a higher proportion of corporate loans, but
we expect BAY to maintain its focus on consumer lending, which is its strength.
The 2006 entry of GE Capital, an expert in consumer banking, has brought the
proportion of retail loans in BAY up to 49%.
Merger with the Bank of Tokyo-Mitsubishi UFJ Bangkok branch? We see it
as highly possible that the Bangkok branch of Bank of Tokyo-Mitsubishi UFJ will
merge with BAY, due to the one presence rule, i.e. the BoT does not allow a single
entity to run two banks. Bank of Tokyo-Mitsubishi UFJ’s Bangkok branch had assets
of Bt450bn (43% of BAY’s assets) and loans of Bt213bn (around 28% of BAY’s loans,
as of October. Based on FY2011 (ending March 2012), Bank of Tokyo-Mitsubishi
UFJ’s Bangkok branch’s net interest margin was ~ 2%, below BAY’s 4.3%, as it has
high exposure to low-risk corporate loans and interbank assets. Bank of Tokyo-
Mitsubishi UFJ’s Bangkok branch’s net profit was Bt3.2bn, accounting for 18% of
BAY’s 2013F.
Maintain Buy. We maintain Buy on BAY with an unchanged target price of Bt35
(1.7x 2013F BVPS), underpinned by its 2013F strong ROE improvement driven by
easing credit cost and cost to income ratio. There is upside risk from the possibility
of a merger with the Bank of Tokyo-Mitsubishi UFJ Bangkok branch.