Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

BAY’s robust 2Q12 operating performance is just another prelude to more profitable days to come. Our upbeat view is underpinned by the great promises of retail banking, management’s increased focus on cost efficiency, and ample room for the bank’s credit cost to decline. BAY’s 2Q12 net profit was in line with both our and consensus forecasts (1H at 50% of full year numbers. With favourable dynamics firmly in place, we raise our FY12-14 EPS and target, now pegged to a higher FY12 P/BV of 2.2x (prev. 1.8x). This valuation target is GGM-based assuming 16% long- term ROE (prev.15%), 11.7% COE and 8% growth. Maintain Outperform
Numbers don’t lie
BAY’s 2Q12 net profit rose 8% qoq and 24% yoy to THB3.7bn, which was in line with our and market forecasts. A moderate 1H12 loan growth of 5.3% was led by retail lending (+12%). NIM
widened qoq on loan mix and contributions from the flood-affected loans and the acquired HSBC retail portfolio. Net fee income jumped 14% qoq on strong bancassurance and card-related businesses. Opex rose on rebranding and HSBC acquisitions although the cost-to-income ratio was flat. BAY swept the gains from its divestment of an affiliate into an extra loan loss provision, setting the base profit expansion into 2H12. This higher provision on a lower NPL base (down to 3.2% of total loans) sent the coverage ratio up to 128%, paving the way for future credit charges to drop.

Multiple profit drivers
Our FY12F EPS is raised on higher estimates of loan growth (by 1%pt to 13%) and NIM (by 5bp to 4.26%). We also trim medium-term credit cost by 10bp to 130bp, which is now aligned
closer with management’s target of 120-130bp. What still differs is our medium-term cost ratio estimate of 48% vs. management’s 45%.

A marathon, not a sprint
BAY has been the best performer vs. peers thus far this year, making a consolidation of share price inevitable. However, we believe its rerating is far from over. We expect the bank’s ROE
to surpass 16% by FY14 (from 13.8% currently), running on the engine of retail banking strength, improved cost efficiency and slimmer credit charges.