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Bank of Ayudhya
KGI Securities (Thailand) has maintained a recommendation of "neutral" for Bank of Ayudhya (BAY) with a target price of Bt21 per share.
Management declined to disclose the amount of capital provision needed to comply with the international accounting standard (IAS39), but admitted that a huge provision is possible. KGI estimates provision of Bt4.8 billion in the fourth quarter to comply with IAS39, up from Bt1.2-1.6 billion a quarter during the first three quarters. As a result, BAY is expected to report a loss of Bt1.47 billion in the fourth quarter and 2006 earnings of Bt3.9 billion, down 35.3 per cent year on year. However, KGI also expects BAY's core earnings to remain strong in the fourth quarter, up 14.6 per cent year on year. There will be an extra gain of Bt426 million from the sale of Sunrise Equity. Personnel expenses are expected to rise due to a bonus payment. Going forward, the number of employees will rise upon the consolidation with GE Money, 100 to BAY and 100 to its subsidiaries out of 400 in total. The increase in personnel expenses has been reflected in the forecast. The net-interest margin was expected to decline in the fourth quarter due to the expiration of some term deposits and migration of deposits from savings into fixed deposits. Since the current interest rates are higher than the expiring deposits, funding costs would unavoidably increase. The major shareholder after capital injection is still the Ratanarak family. By January 10, BAY is expected to receive proceeds of Bt28 billion, of which Bt22.2 billion is from GE Capital International Holdings (GECIH) and the rest from the conversion of 450 million units of warrant held by the Ratanarak family. GE will then have a 29.4-per-cent stake in BAY, while the Ratanarak family stake will be diluted to 32 per cent from 37 per cent. By 2008, when all warrants are converted, GE's stake would decline to 25.4 per cent and the Ratanarak family's to 27 per cent. This capital exercise would strengthen BAY's capital fund, increasing its tier-1 to 13.2 per cent from 7.6 per cent and capital adequacy ratio to 17.5 per cent from 11.8 per cent. There will be a depressed return on equity from the dilution effect and IAS39's impact. With the adoption of IAS39, BAY is expected to set aside another Bt7 billion in 2007, compared to the management's guideline of about Bt3.0 billion per year. Together with the dilution effect from GE capital injection, BAY's return on equity (ROE) profile will be depressed to around 6-11 per cent over the next two years. The management said that a satisfactory ROE level is about 15 per cent.
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