Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

Investment thesis: On Tuesday Sept 25, GE Capital International Holdings Corporation (GE) sold a 7.6% stake in BAY to an undisclosed buyer (or buyers) through a series of big-lot transactions to Morgan Stanley. Presumably, Morgan Stanley is acting as front for a final buyer. The conclusion to draw is that GE will soon sell its remaining 24.33% holding. Although BAY’s long-term fundamentals remain good, in the short-term there probably isn’t much scope for price upside from the Bt31.25 that GE sold its 7.6% stake for last week. As such, we have cut our BAY rating from BUY to HOLD. We suggest switching to TCAP, an HP-driven bank that trades at a cheap PBV of 1.1x (the sector mean is 1.7x).
Good 3Q12 profit growth: We estimate 3Q12 earnings of Bt3.9bn, up by 30% YoY and 5% QoQ. The expected bottom-line expansion was led by loan growth (mostly the retail and SME categories) of 2% QoQ and 11% YoY, lower LLPs and a slight QoQ rise in NIM. However, we forecast that the 4Q12 profit will decline slightly QoQ because of high marketing and promotional costs and IT investment. 
What about GE’s remaining 25% stake? On September 18, GE hired Morgan Stanley to review the options for its 33% holding in Bank of Ayudhya (BAY) on September 18. It’s almost inconceivable that GE would have divested the 7.6% stake if it wasn’t planning to sell its remaining 24.33% holding. Furthermore, a further 17.18% of the shares in the bank are currently held in the form of NVDRs. It’s likely that GE also owns many of the NVDRs.
Although the deal might not alter BAY’s fundamentals, in the run-up to the anticipated takeover, major decision-making will be put on hold. Moreover, the new investor, who will presumably also assume manage-ment control, probably doesn’t have GE’s reputation for retail finance excellence. As such, the market might initially discount the stock of a BAY operation under a new owner until the new management has demonstrated its ability to compete and effectively control risk.

Outlook
Good 3Q12 profit ahead: We estimate 3Q12 earnings of Bt3.9bn, up by 30% YoY and 5% QoQ. The expected bottom-line expansion was led by loan growth (mostly the retail and SME categories) of 2% QoQ and 11% YoY, lower LLPs and a slight QoQ rise in NIM. Our 3Q12 projection represents 27% of our FY12 profit forecast of Bt14.6bn. BAY’s NIM should increase slightly with the acquisition of HSBC’s retail portfolio and the disposal NPLs with a face value of Bt4bn during 1H12. Its 8M12 loan growth was 8% YTD, which is in line with its FY12 target of 11%. The drivers are HP, personal loans and SME business. Corporate lending has been flat YTD, due to intense price-led competition. 
We forecast that the 4Q12 profit will decline slightly QoQ because of high marketing and promotional costs and IT investment in support of BAY’s retail banking platform. The bank’s goal is to raise the retail proportion of its total loan portfolio to 50% by YE12. The HSBC portfolio acquisition and continuing retail lending (HP, personal loans and credit cards) pushed up the proportion from 45% at YE11 to 48% at end-June 2012. Retail lending should sustain BAY’s earnings growth—the NIM on retail loans is fatter than for other categories and there is significant scope for fee income expansion (especially loan-related fees).
Promising outlook: We expect the bank to deliver an even better retail performance next year through the achievement of economies-of-scale. Note that BAY leads in two retail sub-categories—personal loans (20% market share) and credit cards (22% market share).  It is also Thailand’s second-biggest HP vendor with a 15% market share (TBANK leads with a 20% market share).

Details of the divestment: On Tuesday Sept 25, GE sold a 7.6% stake in BAY (523.42m shares) at a price of Bt31.30 apiece to Morgan Stanley (which is presumably fronting for another entity). The Bt16.3bn deal implies an end-June 2012 BVS of 1.76x (in line with the sectoral mean of 1.7x). GE should realize a 96% headline investment gain on the sale—it purchased the stock for Bt16 apiece in 2006 (Bt14 if one were to include five years of dividend income). Clearly, GE is preparing to sell its remaining 24.33% stake and whatever percentage of shares it owns in the form of NVDRs (17.18% of the stock in BAY is held in the form of NVDRs).
BAY presents an attractive proposition because of its strong position as a retail-focused bank, its good asset quality management (a low NPLs/loans ratio of 2.9%) and its big capital base (CAR of 16%). We forecast that its ROE will increase from 9.2% in FY11 to 13.5% in FY12 and 15.1% next year.

Good asset quality management: BAY has slashed its NPLs/loans ratio from 15% at YE07 to 2.9% at end-June 2012. It is due to dispose of another Bt2bn in bad loans in 4Q12, which will cut the ratio further. Note that at end-June, its NPLs stood at Bt24bn with a loan loss coverage ratio of 129% (the sectoral mean is 114%). Risk management does not appear to be an issue under the current management.   
Big capital base can support both organic and in-organic growth: BAY remains open to further loan portfolio acquisitions as appropriately priced opportunities arise. Its big capital adequacy ratio of 16% (Tier-1 11.51%) can support substantial business expansion (and the implementation of the Basel III Accord in 2013) without need for a cash call.  

Recommendation and valuation
Downgrade from BUY to HOLD: As noted above, GE looks set to divest the remainder of its holding in BAY. Although we believe that the Thai bank will deliver strong earnings growth this year and next, regardless of the owner, the Bt31.30 sales price for the big lot transactions of shares sets an unofficial guide as to the likely price for a tender offer (the new owner may not even have to make a tender offer—that will be up to the discretion of the SEC). BAY’s new owner is unlikely to have the same depth of expertise in retail finance as GE, so the market might initially discount the stock until it is confident in the new guard’s ability to compete and manage risk. Therefore, we have downgraded our rating from BUY to HOLD. We also cut our FY13 target price of BAY from Bt43.00 to Bt36.00, pegged to justified PBV at 1.7x.
We recommend switching to TCAP, the largest HP play on the SET, which trades at an undemanding PBV of 1.1x (far below the sectoral mean at 1.7x). Additionally, TCAP has scope for upside from stronger lending expansion than the market currently forecasts. Note that its 8M12 net loan growth was 10% YTD against an FY12 target range of 10-12%.