Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

Investment thesis
BAY’s retail banking platform and its new micro-finance business offer great scope for long-term portfolio and profit growth. Regardless of who buys GE’s controlling shareholding, the bank can do well. Note that the Ratanarak family holds 25% of BAY. Thus, any policy or management change will require the family’s acquiescence. Our BUY rating stands, premised on: 1) a strong FY13-14 profit growth profile, 2) scope for earnings upside from better lending growth and a fatter NIM than modeled and 3) an inexpensive valuation—a YE13 PBV of 1.5x against a regional mean of 2.0x. 
Lending will be posted flat in 1Q13, but will expand the next quarter
Management guides that 1Q13 lending will be posted flat QoQ, attributable to a big loan repayment by a large SME and substantial credit card and personal loan repayments (related to about Bt3bn borrowed in order to buy LTFs and RMFs in Dec 2012). Thus, its 1Q13 NIM will report a decline of 3-4 bps QoQ. BAY expects lending and NIM to expand in 2Q13 and the remainder of the year, led by HP (used cars), mortgages and micro-finance (including subsidiaries such as Srisawad [CFG Service] and First choice). The bank maintains its FY13 loan growth target of 12%.
Normal loan loss provisions for 1Q13 and FY13
BAY says its FY13 loan loss provisioning may fall YoY, as at YE12 its loan loss coverage ratio was high as 146% with a low NPLs/loans ratio of 2.4%. The bank will set FY13 provisions equal to 130 bps of gross loans, down from 137 bps last year. Based on the guidance, we expect 1Q13 LLPs of Bt2.7bn, unchanged YoY. Note that BAY plans to sell another Bt2bn in NPLs in 2H13 of a total of Bt21.5bn on its books as of YE12.
Cost/income ratio rate to fall in 1Q13
The bank claims that its 1Q13 cost/income ratio will post a drop to below 50%, driven by fee income growth and good OPEX management. It expects the ratio to decline further during the rest of the year, led by loan and fee income growth. The bank maintains an FY13 cost/income ratio target of below 48%. We currently model for an FY13 ratio of 51%.  
Good earnings growth for 1Q13
We model that BAY will post 1Q13 earnings of Bt4.2bn, up by 22% YoY and 12% QoQ. Our 1Q13 estimate assumes loan growth of 1% QoQ and 13% YoY, a NIM of 4.16% and fee income expansion of 16% YoY and 1% QoQ. We also expect its 1Q13 loan loss provisioning to rise 3% YoY to Bt2.7bn. We model for a 1Q13 PPOP rise of 11% YoY and 6% QoQ to Bt7.9bn.