Bank of Ayudhya

Bank of Ayudhya Plc (BAY)

Event: MUFG to acquire a 51% stake in BAY. According to several news sites,
Mitsubishi UFJ Financial Group Inc. (MUFG) has agreed to buy a 51% stake in BAY, in
what could be the biggest acquisition by a Japanese bank in Southeast Asia. This
may be announced this week. MUFG will first buy out GE Capital's entire 25% stake
in BAY, a person close to the discussions said. Then, MUFG, Japan's biggest lender,
will launch a tender offer for the remaining shares of BAY; the founding Ratanarak
family will keep its 22% stake and work with MUFG to run the bank as a partner.
The deal is worth an estimated US$4bn or Bt125bn. No official announcement has
been made yet by the parties involved.
Tender offer? If there is indeed a tender offer, it is expected to be only a partial
tender offer in this case due to the foreign holding limit. BAY’s foreign holding
limit is 47.2%, according to the SET, and the foreign holding limit for Thai banks by
law is 49%. To take a 51% stake in BAY, MUFG must gain approval from both the
BoT and MoF. Some Thai newspapers earlier said that MUFG wants to avoid a
tender offer by acquiring less so they would not hit the 25% trigger point and that
the Ratanarak family would buy GE’s remaining shares (i.e. less than 1%).
Therefore, there is still uncertainty about the tender offer.
Acquisition price? Some local newspapers earlier quoted an acquisition price of
around Bt40/share (1.9x 2013F BVPS). This is a reasonable range and in line with
our target price of Bt40 (1.9 x 2013F BVPS).
Increased corporate focus? Mitsubishi UFJ Financial Group is the largest bank in
Japan and its primary strength is corporate lending with only 25-30% exposure to
retail lending. This may lead BAY to a higher proportion of corporate loans, but we
expect BAY to maintain its focus on consumer lending, which is its strength. The
2006 entry of GE Capital, an expert in consumer banking, has brought the
proportion of retail loans in BAY up to 49%.
Merger with BTMU’s Bangkok branch = Recapitalization risk? We see it as
highly possible that the Bangkok branch of Bank of Tokyo-Mitsubishi UFJ (BTMU)
will merge with BAY, due to the one-presence rule. BTMU’s Bangkok branch had
assets of Bt602bn (55% of BAY’s assets) and loans of Bt208bn (~26% of BAY’s loan
portfolio), as of April, 2013. Based on FY2011 (ending March 2012), BTMU’s Bangkok
branch’s NIM was ~2%, below BAY’s 4.2%, as it has high exposure to low-risk
corporate loans and interbank assets. BTMU’s Bangkok branch’s FY2011 net profit
was Bt3.2bn, accounting for 18% of BAY’s 2013F earnings. The merger could bring
up a recapitalization risk for BAY. If BTMU’s Bangkok branch’s loans are transferred
to BAY, BAY’s tier-1 capital adequacy ratio, which is 9%, would be a bit tight.
However, we believe the earnings contribution from BTMU and synergy with MUFG
will be more than sufficient to offset any dilution effect.
Maintain Buy. We maintain Buy on BAY with a positive view on this deal, with
upside risk from the merger with BTMU’s Bangkok branch.