Bank of Ayudhya

Bank of Ayudhya (BAY)
- Q2 2013 profit projected to grow 10.8% qoq despite rising provision, thanks to extraordinary income
We project BAY's 2Q13 net profit at B4.48bn, making quarterly new high, growing 10.8%
qoq and 21.2% yoy due to following supporting factors: 1) 2Q13 net interest income
growth is projected at 4% qoq and 9.1% yoy, in line with this quarter’s net loan
growth projection at 3% qoq and 13.8% yoy. This has urged 1H13 net loan to rise up 3.9%
from end-2012, in line with the bank’s FY2013 target, as well as ours, as loan growth
accelerate during 2H. Loan issuance businesses with continuous growth in this quarter are
SME and retail. In retail sectors, significant growth is signaled in car hire-purchase loans,
credit card loans and housing loans. Especially, car hire-purchase loan growth in 1H13 is
still as high as 10% from end-2012, in line with the target. 2Q13 NIM is projected to
remain stable from the previous quarter at 4.22%. Despite slight increase in funding cost
due to gathering of deposit and bonds in order to refinance the expired deals and support
car hire-purchase loan issuance, yield also increased, stabilizing NIM. 2) 2Q13 growth of
income from other operation is projected at 47.5% qoq and 50.6% yoy, mainly due
to recognition of extraordinary income of B1bn from a reversal of provision for NPL debtors
previously transferred to TAMC (Thai Asset Management Corporation). However, there are
some factors that press this quarter’s earnings result: 1) 2Q13 provision is projected to
rise by 23.3% qoq and 27.1% yoy. Credit cost (debt provision to total loans) is
predicted to rise from 147bp in the previous quarter to 176bp, which is dramatically higher
than policy level at 130bp as the bank decided to increase debt provision to prepare for
economic fluctuation, in line with BOT’s policy that wants commercial banks to set high
provision when they have high profit. BAY has recognized extraordinary income from TAMC
in this quarter, so the addition was used as debt provision. Thus, this quarter’s earning
result is not affected. 2) Fee income is projected to drop by 3.3% qoq (but rising
7% yoy), mostly as a result of decline in fee income in wealth management and capital
market, along with the decelerating market.
- Waiting to revise future forecast when strategy clearly known after BTMU deal
We maintain our 2013-2014’s earnings forecast, but are ready to revise it after we know a
clear business strategy of BAY for the next 2-3 years, especially changes in management
and business structures after there are new shareholders. We are still positive in the case
that BAY's former management team is still working in the company, for their skill and long
experience in retail business. We hope that BAY will keep its clear strategy regarding the
retail business as in present, and, at the same time, show the strength of the new allies,
which is global banking business under its parent company in Japan i.e. Mitsubishi UFC
Financial Group (MUFG). MUFG is a holdings company with shares in over 500 financial
institutions in 40 countries and over 40 million retail clients and 0.5 million corporate
clients. We believe that BAY's development in long run will be positive as business synergy
with new allies will fix BAY's former weakness that BAY had no global network to provide
complete service to corporate clients. A success in acquiring/becoming an alliance with
worldwide financial institutions will prove accomplishment and boost investors' confidence.
We also believe that after the VTO ends, BAY can have an inorganic growth by acquiring
BTMU's Bangkok branch business, according to one presence policy, which will make BAY's
loans and assets grow 26% and 54.1% from present (mostly loans for Japanese clients in
Thai business or Thai-Japanese joint-venture company), while being Thailand’s number 5
commercial bank.
- HOLD" to wait for VTO, suitable price equal to our FV
We downgrade from “BUY” to “HOLD” to wait for the tender offer as the stock price has
limited upside. Tender offer price is suitable as it is same as 2013 fair value at PBV of 1.91x
(GGM) at B39, based on long term ROE forecast of 16%.Based on long term ROE forecast
of 16%, the current share price has 6% upside.