Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

Investment thesis

BAY posted YTD loan growth of 13% for 11M12, prompting us to raise our lending expansion projections to 15% for FY12 and 12% for FY13 from 11% and 10%, respectively. As such, we have upgraded our FY13 earnings projection by 3% to Bt18.5bn. Note that the bank plans to set heavier loan loss provisions for FY12 than we previously assumed, which could offset the effect of stronger lending. We, thus, maintain our FY12 earnings forecast at Bt14.6bn. Our YE13 target price rises 5.5% to Bt38 to fine-tune higher for our more bullish FY13 earnings projection. BUY!

BAY now targets loan growth of 15% in FY12 and 12% in FY13
Management said 4Q12-to-date lending remains strong, led by HP related to the government’s first-time car buyer tax rebate scheme and mortgages (demand for mortgages was boosted by the govt’s first-time home buyer tax rebate). The bank hit its FY12 loan growth target of 11% in November. BAY guides that FY12 lending expansion could be 15%. The bank has set an FY13 loan growth target of 12% (excluding in-organic growth). Based on the YTD performance and management guidance, we have revised up our lending expansion projections to 15% for FY12 and 12% for FY13 from 11% and 10%, respectively.

Bigger loan loss provisions in FY12
BAY will set heavier loan loss provisions for FY12 than it had earlier planned in order to factor in the greater risk inherent in its portfolio after taking delivery of HSBC Thailand’s retail loan business in 3Q12. As such, its FY12 loan loss provisions could reach Bt12bn, comparable with the LLPs set last year when special provisions were set for the 4Q11 flooding. The bank expects FY13 provisions to decline only slightly. Because of the new guidance, we have raised our loan loss provisioning assumptions by 9% for this year to Bt12bn and by 15% for next year to Bt11.5bn.

Cost/income ratio set to decline next year
The bank guides that fee income will rise 16% this year, while FY13 NIM is likely to be sustained at 4.3%. Given strong loan growth, a sustainable NIM and good fee income expansion, management expects the FY13 cost/income ratio to decline to 45% from 48-49% this year. Note that we forecast cost/income ratios of 49.8% for FY12 and 48.6% for next year.

New strategic partner
Management claims that entry of a new managing shareholder presents an opportunity rather than a threat—it could bring with it a client base expansion and/or expertise in niche banking/finance applications. Even if the new shareholder had nothing substantive to offer, it need only let business at BAY continue as normal for it to outperform the sector—the bank has cemented its position as a leading retail banking platform.