Bank of Ayudhya

Bank of Ayudhya Plc (BAY) 

 

Investment thesis

BAY chief executive Noriaki Goto yesterday announced the bank’s financial guidance for the full year. In it, the earnings outlook seems bright, propelled by decent loan demand from the Japanese corporate (onshore/offshore) and retail sectors (housing and personal loans). Such activities allow BAY to create more long-term synergy and lending diversification in the corporate and retail sectors for Thailand and CLMV markets. Presently, BAY’s share price has dropped below our YE16 target price of Bt37, pegged to a PBV target of 1.33x. Given the less downside risk and upside potential, we upgrade our BAY rating to BUY from HOLD.

Retail and corporate to spur prudent loan growth target of 5-6% 

After big loan growth of 28.7% in FY15, the CEO sets prudent loan growth of 5-6% for FY16. Corporate loans are set to rise 4.5-6.0%, driven by Japanese and Thai Japanese JV for overseas expansion in CLMV markets. SME is targeted to grow 3-3.2%% from Japanese firms in Thailand, while retail will rise 4.5-6.0% from mortgage loans. BAY sets its FY16 NIM of 3.7% down from 4.1% in FY15 due to a loan mix change more into corporate (42% of total FY15 loans from 29% in FY14). It also guides for FY16 non-net-interest income (Non-NII) to rise 7%. Amid growing loans, rising non-NII and well managed funding cost, its cost/income ratio is targeted at less than 50% from 47% in FY15 (but we conservatively forecast its FY16 cost/income ratio at 51%).

Asset quality remains well under control

Management said that auto HP default rates (especially for used cars) had returned to normal. The impairment loss for sales of foreclosed assets declined from 40% in FY14 to 25%. This could allow BAY to reduce its credit cost to 145bps from 153bps last year. Note that we expect its FY16 credit cost to be 140bps. Its NPL/loan ratio is targeted to be below 2.5% in FY16 from 2.24% in FY15. Its loan-loss-coverage ratio is set at 135% in FY16 from 141% at YE15. We view that the bank has a big loan-loss cushion to cope with economic uncertainty. 

Potential upside from untapped markets and overseas expansion 

Strategic parent company, The Bank of Tokyo-Mitsubishi UFJ (BTMU), could provide Japanese and Thai clients looking to start operations in Thailand and CLMV markets with support, management advised. It is notable also that BAY last month took over Hattha Kaksekar Limited (HKL), the fourth largest microfinance institution in Cambodia, with loan size of Bt13bn. Besides, BTMU also plans to use BAY’s retail banking platform (developed by GE) to expand its auto, consumer and microfinance lending into neighboring markets—Laos, Vietnam and Myanmar—via an inorganic growth platform. We have yet to factor this plan into our model.