Moody's affirms BAY's Baa2 rating; changes outlook to positive
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Moody's Investors Service has affirmed the Baa2/P-2 foreign currency deposit rating of Bank of Ayudhya (BAY). Moody's has also changed the rating outlook to positive from stable.
In addition, Moody's has affirmed the bank's D+ bank financial strength
rating (BFSR), which maps to a ba1 baseline credit assessment (BCA). The
outlook on the BFSR is stable.
Today's rating action was prompted by the Bank of Tokyo-Mitsubishi UFJ's
(BTMU, Aa3 stable; C/a3 stable) announcement on 2 July 2013 of its plan
to acquire a majority equity stake in BAY. In the announcement, BTMU has
agreed to purchase GE Capital International Holdings Corporation's
(unrated) 25% stake in BAY and will then make a voluntary tender offer
that could take its total stake in the bank up to 75%. The acquisition
will be entirely settled in cash and BTMU has announced no plan to raise
any capital to fund the transaction. BTMU expects to close the
transaction by year-end.
RATINGS RATIONALE
ba1 BASELINE CREDIT ASSESSMENT (BCA)
BAY's ba1 BCA remains unchanged, following today's rating action.
"At ba1, BAY's standalone intrinsic strength reflects its improved asset
quality and stable capitalization. It also reflects its modest domestic
franchise, a business model that is focused on consumer finance -- and
which Moody's deems to be of higher risk relative to its peer banks, and
its tight liquidity profile," says Simon Chen, a Moody's Assistant
Vice-President and Analyst.
"We do not expect any significant changes to the management team or the
strategy of BAY's existing businesses as a result of the proposed
acquisition. We note that BTMU is considering to eventually merge its
Thai branch with BAY. Moody's will assess the impact of such a
transaction on BAY's financial profile and strategic direction once there
are more details announced concerning this proposed integration," adds
Chen.
Baa2 DEPOSIT RATING
BAY's Baa2 deposit rating is driven by its ba1 BCA, plus two notches of
uplift to reflect our systemic support assumptions.
As the fifth largest bank in Thailand by system deposits with a 5% market
share at end-2012, Moody's views BAY to be systemically important.
Moody's assesses the probability that the Thai government will support
BAY during financial distress to be very high. This probability of
support will remain unaffected by any changes in the bank's shareholding
structure.
POSITIVE OUTLOOK ON Baa2 DEPOSIT RATING
The positive outlook for BAY's Baa2 foreign currency deposit rating
reflects Moody's expectation that BAY may benefit from support in times
of stress from its new parent BTMU upon successful completion of the
transaction. BTMU expects the planned acquisition to be completed by
December 2013.
"In the scenario that BTMU succeeds in acquiring a majority stake in BAY,
we expect BTMU to be a supportive shareholder, considering the
complementary benefits that BAY's established Thai franchise would add to
BTMU's existing Thai branch operations and overseas network, and BTMU's
track record of demonstrating strong commitment to its overseas
investments," says Chen.
As such, BAY's deposit rating may benefit from an additional notch of
uplift to reflect our new parental support assumptions, upon the
conclusion of the transaction.
In assessing parental support, Moody's will consider various factors in
order to determine the predictability of parental support for BAY,
including the availability of any explicit legal undertaking by BTMU to
provide financial support to BAY, management control of BAY by BTMU, the
strategic fit and importance of BAY to BTMU's regional expansion and
business strategy, and BTMU's track record of providing support to its
overseas subsidiaries and investments.
WHAT COULD DRIVE THE RATINGS DOWN/UP
BAY's ratings could be upgraded if Moody's concludes that BAY will
benefit from specific and forthcoming parental support from its incoming
parent BTMU, following the completion of the planned acquisition. Also,
the bank's ratings could be upgraded if it continues to demonstrate
improving credit metrics, such as with risk-adjusted profitability,
measured by net income - as a percentage of risk-weighted assets --
exceeding 2.0%; non-performing loans (NPLs) as a proportion of gross
loans falling below 2.0%; NPLs as a proportion of shareholder's equity
and loan loss reserves falling below 12%; and credit risk concentration
in single borrowers and industry sectors falling significantly.
Conversely, BAY's ratings could be downgraded or its positive rating
outlook could be revised to stable if Moody's concludes that BAY will not
benefit from parental support from BTMU upon the completion of the
planned acquisition, and/or if the bank begins to show signs of
deterioration in its credit profile as evidenced by an increase in its
NPL ratio above 3.5% over several quarters; an increase in
loan-to-deposit ratios to above 130%; and an increase in NPLs, as a
proportion of shareholder's equity and loan loss reserves, above 20%.
The principal methodology used in this rating was Global Banks published
in May 2013. Please see the Credit Policy page on www.moodys.com for a
copy of this methodology.
Headquartered in Bangkok, Bank of Ayudhya reported total assets of
THB1,103 billion (USD35.6 billion) as of 31 March 2013.
