Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

2Q13 profit lower than projected. Debt provision increases, core business good as expected
BAY posted 2Q13 net profit at only B3.03bn, failing to make a new quarterly high as the
profit contracted 24.9%qoq and 17.8%yoy due mainly to higher-than-expected debt
provision. The debt provision was increased B2.55bn as a preparation for the economic
fluctuation, correspondent to the BOT’s policy. Excluding the extraordinary provision, the
debt provision in 2Q13 was still as much as B3.35bn, rising 9%qoq and 12.1%yoy, mainly
from provision for a corporate debtor that had defaulted on debt and become NPL, making
the NPL to total loan ratio in 2Q13 shift slightly to 1.85% from 1.81% in 1Q13. As BAY
recognized an extraordinary income from reversal of estimated loss on the impaired assets
transferred to Thai Asset Management Corporation (TAMC) at B1.08bn in this quarter, it
brought the money to make the additional debt provision, thus helping alleviate the effect of
the increased NPL on the overall earnings. In terms of the core businesses, they have shown
magnificent growth. 1) 2Q13 net interest income growth stood at 3.7% qoq and
9.4% yoy, in line with this quarter’s net loan growth of 3.2% qoq and 14.1% yoy. This has
urged 1H13 net loan to increase to 4.1% from end-2012, which is still in line with the bank’s
FY2013 target, as well as ours, at 12%, because loan growth usually accelerates during 2H.
Loan issuance business with continuous growth in this quarter is retail. Significant growth
has been seen in car hire-purchase and housing loans. Especially, car hire-purchase loan
growth in 1H13 is still as high as 13.5% from end-2012, in line with the target. 2Q13 NIM
has remained stable from the previous quarter at 4.20%. 2) 2Q13 growth of income from
other operation stood at 26.9% qoq and 29.6%yoy – lower than expected, due to
income recognition of more than B710m from a reversal of bad debt expense for Dubai
World Group Finance Ltd. 3) Fee income has grown 1.5%qoq and 12.2%yoy, mainly from an
increase in fee income in Bancassurance business, wealth management, and funds.
- Business synergy from new partner boosts profit growth in long run
We maintain our 2013-2014’s earnings forecast, but are ready to revise it after we know a
clear business strategy of BAY for the next 2-3 years, especially changes in management
and business structures after there are new shareholders. BAY still keeps its clear strategy
regarding the retail business as in present, and, at the same time, show the strength of the
new allies, which is global banking business under its parent company in Japan i.e.
Mitsubishi UFC Financial Group (MUFG). MUFG is a holdings company with shares in over 500
financial institutions in 40 countries and over 40 million retail clients and 0.5 million
corporate clients. We believe that BAY's development in long run will be positive as business
synergy with new allies will fix BAY's former weakness that BAY had no global network to
provide complete service to corporate clients, especially the Japanese in Thailand and
overseas. A success in acquiring/becoming an alliance with worldwide financial institutions will prove accomplishment and boost investors' confidence. We also believe that after the
voluntary tender offer (VTO) ends, BAY can have an inorganic growth by acquiring BTMU's
Bangkok branch business, according to one presence policy, which will make BAY's loans and
assets grow 26% and 54.1% from present (mostly loans for Japanese clients in Thai
business or Thai-Japanese joint-venture company), while being Thailand’s number 5
commercial bank.
- Hold and wait to make VTO. Suitable TO price equates to fair value.
For a long-term investment, we recommend holding BAY for the tender offer, but for the
short-term we recommend gradually selling because the share price has very limited upside
now. The tender offer price is a suitable price because it is the same as the fair value at PBV
of 1.91x (GGM) at B39, based on long term ROE forecast of 16%.