Bank of Ayudhya

Bank of Ayudhya Plc (BAY)
 

Investment thesis: We reiterate our BUY rating on BAY, based on: 1) sustainable loan growth, 2) well-managed NIM, 3) lower LLPs and tax expenses and 4) potential for earnings upside (from OPEX management and BOT soft funding-enabled loan growth). We expect the bank to achieve the fastest FY12 and FY13 earnings growth in the sector of 49% and 21%, respectively, to Bt13.8 and Bt16.7bn. Our YE12 target price of Bt30.50 stands, pegged to a justified YE12 PBV of 1.63x, close to BAY’s peak PBV in 2010. 
Strong 1Q12 profit growth: We estimate 1Q12 earnings of Bt3.3bn, up by 18% YoY and 591% QoQ. Bottom-line expansion was led by lower LLPs, a reduced tax rate and loan growth. Our 1Q12 estimate represents 24% of our FY12 profit forecast of Bt13.8bn, which we maintain unchanged. We expect further earnings growth in 2Q12, driven by increased lending a fatter NIM and greater fee income related to loans.
Loan boost from buying HSBC’s retail portfolio: BAY guides that it will consolidate HSBC Thailand’s Bt13bn retail loan portfolio (which it purchased in February 10, 2012) into its 1Q12 accounts. Thus, we calculate loan growth of 2% for the quarter. BAY will focus on expanding its HP, credit card and SME operations in 2Q12. Note that the BOT allocated the bank Bt24.5bn in soft funding for it to lend on to clients affected by the 4Q11 flooding, which should start to impact in 2Q12 lending numbers. Nevertheless, for the moment our FY12 loan growth forecast remains 11%.
NIM will post a dip in 1Q12: Management stated that 1Q12 NIM will decline slightly as a result BAY’s acquisition of HSBC’s loan portfolio and the BOT’s 0.47% levy on deposits and bank-issued B/Es (up from 0.40%, which was charged only on deposits). As such, we expect 1Q12 NIM to report a dip to 4.17% from 4.20% in 4Q11. We maintain our FY12 NIM assumption at 4.3% (below BAY’s target of 4.4%).  
Normalized LLPs will drive growth: BAY plans to set FY12 loan loss provisions equal to 1.4% of lending, or about Bt10bn. That implies 1Q12 LLPs of Bt2.5-2.8bn. Our model indicates provisions of Bt2.8bn for the quarter, down 25% QoQ (the bank set extra LLPS related to the 4Q11 flooding) but up 2% YoY. Our FY11 and FY12 LLP forecasts are both Bt12bn.
Outlook
Strong 1Q12 profit growth: We estimate 1Q12 earnings of Bt3.3bn, up by 25% YoY and 591% QoQ. Bottom-line expansion was led by lower LLPs, a reduced tax rate and loan growth. Our 1Q12 estimate represents 24% of our FY12 profit forecast of Bt13.8bn, which we maintain unchanged. Note that NIM dipped with the acquisition of HSBC’s retail portfolio and the BOT’s imposition of a 0.47% levy on deposits and bank-issued Bills of Exchange (explained in greater detail below). Our 1Q12 estimate represents 24% of our FY12 profit forecast of Bt13.8bn, which we maintain unchanged.
We expect further earnings growth in 2Q12, driven by increased lending, a fatter NIM and greater fee income related to loans. The bank is working to increase the retail proportion of its total loan portfolio to 50% by YE12. The HSBC portfolio acquisition pushed up the proportion from 44% to 45%.
11% gross loan growth guidance for FY12: BAY said organic lending recovered modestly in 1Q12 and that it will consolidate HSBC Thailand’s Bt13bn retail portfolio (mostly credit cards) into its accounts for the quarter. Thus, its loan portfolio at end-March should be at least Bt13bn up on the YE11 number. We assume loan growth of about 2% QoQ, which would be a bit below the trend necessary to achieve its FY12 lending growth target of 11%. Management guides that it will focus on expanding the HP, credit card and SME businesses in 2Q12. 
The BOT allocated BAY Bt24.5bn in soft funding for BAY to lend on to clients affected by the 4Q11 flooding, which should start to impact in 2Q12 lending numbers. Nevertheless, for the moment our FY12 loan growth forecast remains 11%.