Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

Q1 2013’s profit grows 7.7%qoq. Provision increases, fee grows, NIM rises
BAY posted 1Q13’s net profit at B4.04bn, growing 7.7%qoq and 17.9%yoy, lower than our
projection and comprising only 22% of our FY2013’s net profit forecast because of higherthan-
expected debt provision of B3.08bn or a rise of 6.3%qoq and 13.6%yoy. Credit cost
was 147bp, up from 140bp in the previous quarter and exceeding the policy rate of 130bp.
The bank clarified the provision raise that it wanted to increase coverage ratio (LLR/NPL) to
138.1% at end-1Q13 from 135.5% at end-2012, which was consistent with the overall
situation of the industry in this quarter, not because of the bank’s worse asset quality. This
reflected from NPL (gross) that still stabilized at a low level of 1.81% of total loans. Robust
growth was still seen from the core business due to following factors. 1) Net interest
income in 1Q13 has grown 2.9%qoq and 13%yoy – better than expected. Net loan
growth in 1Q13 has quite declined and been lower than the bank’s and our target for
FY2013 at 12%yoy. Corporate loans decreased as a result of debt repayment at the end of
the quarter, while credit card and personal loans contracted due to repayment of credit card
debts for LTF and RMF purchases at the year-end. These declines have offset the growth in
other retail loans, especially new-car hire-purchase loans that grew aggressively in 1Q13 by
7.6%qoq. NIM in 1Q13 shifted around 4bp to 4.22%. Although loan yield has declined as a
result of pressure from new-car loans, funding cost has also decreased in this quarter as a
result of repricing of interest rate for special deposits that have been previously raised
aggressively by the bank. The new rate was higher than that for savings deposits but lower
than that for fixed deposits, so it was beneficial for NIM. 2) Fee income in 1Q13 has
thrived 6.9%qoq and 25.6%yoy – better than expected and very high comparing to
the bank’s and our target in FY2013 at 15%yoy, mainly from the growth of fee income from
non-loan-related transactions such as Bancassurance, fund sales, and securities business
that has grown following the capital market. Operating expenses have decreased 1.3%qoq
in this quarter, but cost to income ratio was high at 50.6%, above the bank’s target in
FY2013 at lower than 48%, because of high employee expenses. Nevertheless, overall, the
aforementioned positive factors were able to compensate for all the negative factors and
even help boost 1Q13’s profit to a new high.

Maintain forecast. 2013’s strategy is focusing on retail loan to increase fee income
We maintain our earnings forecast for 2013 - 2014, projecting net profit growth in 2013-
2014 at 23.9%yoy and 20.3%yoy, respectively, with the bank’s continuous aggressive
penetration into high yield loans, both retail and SME that are promising as well as strong
demands for SME loans along with growing demands for corporate loans from entrepreneurs
running supply chain business. At the same time, the bank has also given significance to
corporate loans, despite their low yield, in order to create an opportunity for expanding
loan-related fee income and non-loan-related fee income such as cash management,
Bancassurance, and other retail transactions.

Buy. Share price is substantially laggard peers against low PBV and PER
We reiterate our BUY recommendation for BAY. 2013’s fair value at 1.91x PBV (GGM) is B39
(based on long-term ROE at 16%), which implies around 13% upside from the current share
price. We believe BAY has a chance to outperform the market again because the current
share price has relatively low PBV and PER compared with the sector’s average, contrary to
its promising earnings growth.