Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

Investment thesis: We have revised up our BAY FY12-13 profit projections by 6% and 9%, respectively, to Bt14.6bn and Bt18.1bn. Excellent asset quality management together with a big loan loss cushion will enable the bank to cut loan loss provisioning in 2H12 and FY13. Therefore, we have cut our FY12-13 LLP assumptions by 8% and 16%, respectively, to Bt11bn and Bt10bn. Because of our expanded bottom-line and higher ROAE expectations, we have raised our YE12 target price by 9.8% to Bt33.50, pegged to a PBV of 1.78x.
Strong 2Q12 profit growth: We estimate 2Q12 earnings of Bt3.8bn, up by 26% YoY and 9% QoQ. Expected bottom-line expansion was led by loan growth of 2% QoQ, lower LLPs and a slight QoQ rise in NIM. Our 2Q12 estimate represents 26% of our new FY12 profit forecast of Bt14.6bn. We expect further earnings growth in 3Q12, driven by retail and SME lending, lower LLPs and increased loan-related fee income.
Lower LLPs = higher profit: Management aims to cut FY12 LLPs from 1.4% of total lending to 1.3%, or Bt11bn. The bank also plans to reduce its LLPs to 1.2% of total loans, or Bt10bn, next year. Based on the bank’s guidance, we have cut our FY12-13 LLPs projections by 8% and 16%, respectively, to be in line with its numbers. As such, we have revised up our FY12-13 earnings projections up 5.8% and 8.7%, respectively, to Bt14.6bn and Bt18.1bn.
2Q12 NIM will inch up QoQ: BAY stated that 2Q12 NIM will rise slightly as a result of its acquisition of HSBC’s retail loan portfolio and due to good funding management. As such, we expect a 2Q12 NIM of 4.25%, up from 4.18% in 1Q12. We maintain our FY12 NIM assumption at 4.3% (below BAY’s target of 4.4%).  
Scope for lending growth upside: Although management set an FY12 loan growth target of 11%, we see potential for upside, led by BOT soft funding (for clients affected by the 4Q11 flooding) of Bt24.5bn, which represents 3.3% of BAY’s current portfolio. Note that we haven’t factored the BOT funding into our model yet. For the moment, we conservatively assume loan growth of 11% in FY12 and another 10% in FY13.
Outlook
Strong 2Q12 profit growth: We estimate 2Q12 earnings of Bt3.8bn, up by 26% YoY and 9% QoQ. Expected bottom-line expansion was led by loan growth of 2% QoQ, lower LLPs and a slight QoQ rise in NIM. Our 2Q12 estimate represents 26% of our new FY12 profit forecast of Bt14.6bn, which we have just raised by 5.8%, due to a lower loan loss provisioning assumption. Note that NIM should increase slightly with the acquisition of HSBC’s retail portfolio and the disposal NPLs with a face value of Bt4bn during 1H12.
We expect further earnings growth in 3Q12, driven by lending, an improved NIM and lower loan loss provisions. BAY is working hard to increase the retail proportion of its total loan portfolio to 50% by YE12. The HSBC portfolio acquisition and continuing retail lending pushed up the proportion from 45% to 47% at end-March 2012. The bigger retail loan portfolio should sustain earnings growth via a good NIM and greater fee-based income, especially fees related to loans.
Scope for lending growth upsides: Net lending rose by 4.8% YTD and 12.3% YoY as of end-May, a trend somewhat in excess of what would be needed for BAY to achieve its FY12 loan growth target of 11%, especially given that second-half business normally rises HoH on seasonality. For the moment, our FY12 assumption is also 11%. Additionally, the BOT awarded BAY Bt24.5bn in soft funding (for clients affected by the 4Q11 flooding), which represents 3.3% of its current portfolio. Note that we haven’t factored the BOT funding into our model yet.