Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

Investment thesis: We expect BAY to prove resilient to the fragile global economy and intensifying competition for business. The bank is focused on retail lending. Its asset quality management remains good with a low NPLs/loans ratio of 4.7% and a big loan loss cushion of 93%. We do not currently have any operational concerns about the bank. We forecast profit growth of 32% to Bt11.6bn for FY11 and a further 29% to Bt15bn for FY12. BAY’s 2H11 lending normally expands HoH, led by the retail and corporate portfolios. We, thus, reiterate our BUY rating.
Strong YoY profit growth for 3Q11: We estimate that BAY will deliver a 3Q11 profit of Bt2.9bn, up 24% YoY, (but down 2% QoQ, due to lower investment gains and higher OPEX). The YoY earnings growth is driven by lending expansion, higher fee income and well-managed OPEX. The cost/income ratio should be 51.6%. We maintain our FY11 cost/income ratio assumption at 53% (consistent with management’s target).
Good 3Q11 lending on seasonality: BAY guides for strong lending growth in 3Q11, despite the flooding. The bank reaffirmed its FY11 loan expansion target of 11%, led by the retail and corporate categories. Management indicated a slew of big-ticket loans in 3Q11 following the July 3 election. We estimate 3Q11 loan growth of 2.2% QoQ, led by the retail portfolio (HP and personal loans).
NIM to be sustained at 4.4%: Despite intensified competition among banks for deposit mobilization, management anticipates a sustained NIM of not less than 4.4% (based on the new accounting standard). BAY says it will diversify funding sources more into bills of exchange to expand retail lending (which yields the fattest margins). Management guided for a 3Q11 NIM of 4.5%.
Fee income growth of 12%: BAY targets FY11 fee income expansion of 12%, led by fees related to loans, trade finance and bancassurance. The bank sees scope for further upside to bancassurance sales after partnering with two major insurance operators last month— Ayudhya Allianz CP and Thai Life Insurance.