Bank of Ayudhya

Bank of Ayudhya Plc (BAY) 

Earnings were 6.5% below our number

BAY posted a 3Q14 profit of Bt3.5bn, down 7% YoY but up 1% QoQ. The result was 6.5% below our forecast and 5.0% short of the Bloomberg consensus, attributable to heavier loan loss provisioning than modeled (BAY set 3Q14 LLPs of Bt4.9bn; we had assumed only Bt4.5bn). Pre-provisioning operating profit (PPOP) rose by 13% YoY and 5% QoQ to Bt9bn. 9M14 earnings represent 70% of our old FY14 projection.

Results highlights

Lending rose by 3.1% QoQ and 3.3% YTD—better than our assumption of 1.0% QoQ growth. The retail loan portfolio increased 1.5% QoQ, led by 3.1% QoQ growth in home mortgages. Corporate lending expanded by 5.2% QoQ and 1.9% YTD, chiefly due to the draw-down of a single big-ticket line of working capital. SME business rose by 3.8% QoQ and 5.9% YTD. The 3Q14 lending growth pushed up NIM by 2 bps QoQ and 4 bps YoY to 4.26%. Non-interest income (NII) increased by 4% YoY and 3% QoQ, in tandem with loan growth.

Fee revenue expanded by 5% YoY and 4% QoQ to Bt4.1bn. OPEX inched up by 1% YoY and 1% QoQ to Bt8.6bn. BAY’s 3Q14 cost/income ratio was 48.6%, down from 51.5% in 3Q13 and 49.5% in 2Q14, due good OPEX management and fee income growth.

Loan loss provisions jumped by 55% YoY and 15% QoQ to Bt4.9bn (above our expectation, as noted above). BAY’s NPLs/gross loans ratio declined to 3.3% from 3.0% at end-June, while its loan loss coverage ratio slipped to 123% at end-September from 134% three month earlier. 

Outlook

4Q14 earnings should rise slightly QoQ on lending growth and lighter LLPs, both QoQ and YoY.

What’s changed? 

We have slashed our earnings projections by 19% for FY14 to Bt14bn and by 18% for FY15 to Bt18bn to factor in substantially heavier LLP assumptions for this year and next. We have increased our provisioning assumptions by 24% for FY14 to Bt18bn and by 28% for FY15 to Bt18.5bn.

Recommendation 

Given the disappointing 9M14 earnings (due because of heavier LLPs than modeled), we maintain our SELL rating on BAY. The following issues are also in play: 1) the 15% dilution effect in BAY’s EPS in FY15 after the bank issues 1,100m new shares to be held by the Bank of Tokyo Mitsubishi (BTMU) in exchange for BTMU’s Bangkok branch and 2) expectations of extra expenses tied to consolidation with BTMU (such as amortization and goodwill).