Bank of Ayudhya

Heavy deferred tax expenses Target Price: 28.50 Price (20/10/11): Bt21.30

Bank of Ayudhya Plc (BAY)

Profit 73% short of estimate: BAY posted a 4Q11 profit of Bt478m, a plunge of 79% QoQ and 84% YoY. The result was 73% below our estimate and undershot the consensus by 88%. The bank booked Bt2.1bn in one-off deferred tax expenses (ahead of the headline corporate tax decline to 23%). Pre-provisioning operating profit (PPOP) grew by 46% YoY and 13% QoQ to Bt7bn (10% higher than we expected). FY11 earnings rose 6% YoY to Bt9.3bn, equal to only 88% of our FY11 forecast.

Results highlights: Lending grew by 3.2% QoQ and 11% YoY—we had expected it to be flat QoQ and up 9% YoY. The corporate and retail portfolios expanded by 3.6% QoQ and 4.3% QoQ, respectively, while SME loans increased 1% QoQ. 4Q11 net interest margin (NIM) plummeted 34 bps QoQ to 4.2% because of debt relief (worth Bt560m) for employees and clients affected by the flooding. Net interest income (NII) declined by 9% YoY and 6% QoQ to Bt9.1bn.

BAY's 4Q11 loan loss provisions rose by 19% YoY and 43% QoQ to Bt3.7bn in preparation for a surge in NPLs. But in the interim, the NPLs/gross loans ratio dipped further to 3.7% at YE11 from 4.3% at end-Sept. The loan loss coverage ratio rose to 106% at YE11 from 99% at end Sept.

Outlook & model adjustments: We expect BAY to lend more aggressively this year, so have upped our FY12-13 lending forecasts to 11% and 10%, respectively, from 7% for both years. But we have cut our NIM assumptions for both FY12 and FY13 by 20 bps to 4.25% and 4.2%, respectively, as the BOT's plan to levy new fees on deposits and bank-issued B/Es in 2H12 (in order to service FIDF debt) will squeeze NIM. BAY's aggressive lending policy should offset the effect of NIM squeeze. As such, our FY12 profit forecast remains Bt13.4bn, up 46% YoY.

Recommendation: Our BUY rating stands, premised on: 1) a strong retail lending growth profile, 2) improved asset quality, 3) rising efficiency and 4) a substantial CAR of 16.3%, enabling both organic and in-organic business expansion during FY12-13 without need for capital-raising. Our YE12 target price is Bt28.50, pegged to a PBV of 1.5x. Key Ratios & Statistics