Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

Investment thesis
Last week, Ms Janice Rae Van Ekeren, CEO of BAY, and Mr Poonsit Wongthawatchai, SVP of Investor Relations, met with 16 foreign institutional investors in Hong Kong. The bank’s FY13 earnings outlook is good, driven by retail growth and efficiency enhancements. Our BUY rating stands on BAY (regardless of who buy’s GE Capital’s controlling stake) premised on: 1) a strong FY13-14 core earnings growth profile, 2) scope for profit upside from better lending growth than modeled and 3) a cheap valuation—a YE13 PBV of 1.5x against a regional mean of 1.9x.
Most investors confident in BAY management  
During the NDR, most of the fund managers expressed confidence in BAY’s retail-platformed business model. The bank targets modest FY13 loan growth of 12% with a greater focus on under-served retail markets (people earning less than Bt15,000/m) and micro-SME finance. BAY expects these high-yield businesses to push up its FY13 NIM to 4.4% from 4.3% last year (the sectoral NIM is 3%). Likewise, it guides for FY13 fee income growth of 15%. BAY targets a cost\\income ratio of below 48%, down from 51% last year (we, however, conservatively forecast its FY13 cost/income ratio at 51.5%).
Good asset quality management (GE model)
Investors expressed some concern about BAY’s new business growth focus (low income earners and micro-SME finance), but management guided that the GE credit-scoring model has reduced NPLs to Bt21.3bn at YE12 from Bt29.5 at YE11 (4Q11 flooding triggered a surge in defaults). Its NPLs/ loans ratio was 2.4% at YE12, down from 3.7% at YE11. BAY’s loan loss coverage ratio was 146% at YE12. The bank plans to trim its FY13 credit cost to 130 bps of gross loans from 137 bps last year. Given its loan loss reserve excess of Bt12.5bn above the BOT’s minimum requirement, management doesn’t expect to set extra loan loss provisions to cover for counter-cyclical risk. 
Incoming managing shareholder
The institutional investors asked what GE’s planned sale of its controlling shareholding might mean for the bank and who the new owner would be. Management declined to answer, except to say that a new owner should deliver new business and new  opportunities to BAY. The implication is that the Ratanarak family, which has the second-biggest stake, has the right to reject a potential new shareholder if it doesn’t appear to have anything to offer to the bank. A new shareholder would also need the acquiescence of the family if it wanted to change the strategic direction of BAY.