Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

Investment thesis: We have revised down our BAY FY11 and FY12 earnings forecasts by 9% and 10%, respectively, to Bt10.6bn and Bt13.4bn because of weak fee income and higher OPEX brought on by flooding in 4Q11 and due to the bank’s aggressive expansion plans for next year. We have raised our FY11-12 cost/income ratio assumptions to 53.1% and 53.3%, respectively, from 52.5% and 52.0%. Given our pared back expectations for the bottom-line, we have reduced our YE12 target price from Bt32 to Bt28.50, based on a justified YE11 PBV of 1.5x. 
Loan growth will be on target at 11%: BAY guides that the flooding impacted November lending, but FY11 loan growth will still be about 11%, as targeted. The retail and corporate categories were the main contributors to December portfolio expansion. Additionally, BAY plans to review its FY12 targets early this year. We maintain our gross loan growth projections at 10% for FY11 and 7% in FY12.
NIM may post a dip for 4Q11: Management stated that 4Q11 NIM will decline as a result of debt restructuring for clients affected by the flooding and higher funding costs brought on by heightened competition for deposits. We reiterate our FY11-12 NIM assumptions of 4.48% and 4.36%, respectively, and estimate a 4Q11 NIM of 4.31%, down from 4.55% the previous quarter. 
Cost/income ratio expansion: The bank guides for some extra expenses associated with flooding in 4Q11. Note that BAY closed 10% of its branches during the worst of the inundation and also announced generous help for affected staff members. We have raised our cost/income ratio projections from 52.5% for FY11 and 52.0% for FY12 to 53.1% and 53.3%, respectively.
Heavier 4Q11 LLPs for “environmental reserve”: BAY anticipates setting heavier loan loss provisions for 4Q11 to reflect the impact of the flooding, even though management guides that the inundation won’t impact its 4Q11 NPLs much. Based on our model, we estimate LLPs of Bt3.5bn in 4Q11, up by 35% QoQ and 14% YoY. Note that we maintain both our FY11 and FY12 loan loss provision projections at Bt12bn.