Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

BAY announced that it has signed an agreement to acquire HSBC Thailand’s retail banking business, including credit cards, personal loans, mortgages and deposits. The acquisition, subject to conditions including shareholder and regulatory approvals, represents an investment of Bt3,557m and is expected to be completed within 1Q12.
 
Comment: As at 31 December 2011, HSBC’s retail banking business has total assets of Bt13.4bn and total liabilities of Bt17.5bn. On the transaction closing date, if total assets are less than total liabilities, HSBC will contribute cash to make up the difference so that assumed assets on the transaction date is equal to the assumed liabilities. As a result of the transaction, BAY’s asset base will grow by Bt17.5bn or 1.8%, increasing retail loans from 45% to 46% of total loans. Hence, this deal will raise our loan growth assumption to 11.5% from 10.0%, previously. But BAY’s net profit will inch up only 2% following the acquisition. On a positive note, the acquisition will enable BAY to strengthen its leading position in retail banking in Thailand to serving over 10m customers with over 4.8m credit cards in circulation. We have rolled over BAY’s valuation using FY12F P/BV of 1.3x, to derive a new TP of Bt23.50. We have already factored in higher DPA fee of 0.55% for deposits and 0.50% for Bill of Exchange (B/E). Maintain Hold as the positive news is already priced in.

Comment: As for the justifications of yesterday's widely expected policy interest rate cut of 25 bps to 3.00 per cent by the Bank of Thailand (BoT), it appears the central bank not only expects a greater impact from the floods, but also expects a more long drawn out recovery. Indeed, it spelled out the recovery would be supported by government measures, improving confidence and accommodative monetary conditions. At 3.00%, policy rate is more neutral than accommodative and this suggests the BoT is not done with cutting interest rates.
 
On inflation, too, the BoT appears less concerned than before. It dropped any mention of inflation pressures from government spending and private sector recovery and instead noted that inflation pressure has declined reflecting a more prolonged recovery in domestic demand. Finally, instead of the 5-2 vote to reduce rates at the last meeting, the monetary policy committee voted unanimously to reduce the policy rate to 3.00% yesterday.

Our forecast for rates to stay steady at current levels is under review following this meeting. However, the number of cuts we might add to the rate trajectory also depends on the speed of recovery in manufacturing production and more generally our Thai and global economic outlook. Production data for December is out tomorrow and we expect production to have clawed back over 50% of the drop in production. This means production clocked a sequential rise of 50% (MoM, sa) and an annual growth rate of -20% (YoY), better than market consensus of -30% (YoY). Our forecast for 2012 GDP growth, at 5.5%, is also stronger than BoT forecast of 4.1%. While we are concerned that a blow-out in Europe will pose a systemic threat to global financial stability, our central scenario envisages the recession in Europe to be largely contained within its shores. Coupled with the Thai government’s planned expansionary policies, we are not more worried about Thai growth than we are about inflation.