Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

- 3Q13 profit much lower than projected. Other income falls, core business stable
BAY posted 3Q13 net profit at only B3.79bn, 18% lower than projected (but still growing
24.9%qoq and 1.4%yoy after contracting harshly in 2Q13) because a decline in other
income - profit from a sale of NPA including repossessed cars, was worse than expected.
Moreover, other expenses were higher than expected as impairment provision for NPA rose
by B245m. Excluding the items, a key supporting factor that made 3Q13 net profit grow was
debt provision that decreased 46.7%qoq (but still increasing 13%yoy) – as expected. Credit
cost dropped to close to a normal level of 140bp (per year). NPL to total loan in 3Q13
decreased to 1.78%; despite an increase in NPL from used car loans, it was not so much that
became worrying. At the same time, NPL from new car loans, especially first cars, was very
low. Considering the core business, slight growth was seen when compared with the prior
quarter. Net interest income in 3Q13 grew 2.3%qoq and 10%yoy – as expected, in line with
the net loan growth of 2.9%qoq and 13.4%yoy, pushing 9M13 net loan growth to 7.1% from
end-2012, which was quite low compared with FY2013 target of the bank at 12%yoy (BAY is
reviewing its target) but still in line with our target at 9%yoy. Impressive growth was seen
from all types of loans, especially corporate loans that benefited from increasing
disbursement in this quarter. SME and retail loans also showed good growth, particularly car
leasing (new cars), housing, credit card, and personal loans. Meanwhile, NIM in 3Q13
decreased slightly by 4bp from the previous quarter to 4.16%, mostly because of an
increase in funding cost (as a result of aggressive deposit raising in the previous quarter)
that beat an increase in loan yield. At the same time, fee income in 3Q13 weakened a little
by 1.9%qoq, though still grew 11.2%yoy, mainly because of lower fee income from capital
market related transactions, whereas fee income from bancassurance and capital and fund
management still increased.

- Cut FY2013-2015 forecast, effect from capital increase for BTMU excluded
We revise down our FY2013-2015 earnings forecast, cutting FY2013 net profit forecast to
reflect worse-than-projected earnings in 9M13, which make up only 61% of FY2013 forecast
we have projected. For FY2014-2015 earnings forecast, we slash our assumption for the core
business we had previously overestimated. We have still not included an effect from a
merger with BTMU's branch in Thailand and PP capital increase for BTMU at not exceeding
1.5 billion shares, as we have no exact information about BAY's clear business strategy in
the next few years, especially regarding a change in management and business structures
after there are new shareholders. Nevertheless, we hold a positive outlook toward BAY's
long-term business strategy that it would be more aggressive, mainly the coming of loans
clients from Japan who transact in Thailand or Thai-Japanese joint companies in order to
develop sales of other financial product in the BAY group. Moreover,
BTMU's strength is its global banking business under its parent company in Japan -
Mitsubishi UFC Financial Group (MUFG). MUFG is a holdings company with shares in over 540
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 the new ally 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 an alliance with worldwide financial institutions will prove
accomplishment and boost investors' confidence.

- Hold and wait to make VTO. Tender offer price close to fair value
We recommend holding BAY for the tender offer to take place around November-December
2013. The tender offer price is a suitable price because it is close to FY2013 fair value at PBV
of 1.91x (GGM) of B38.27, based on long term ROE forecast of 16%.