The Nation



Bank of Ayudhya

Consolidation will take 12 months

Bank of Ayudhya Plc (BAY)

Investment thesis

Due to the weak economy and prevailing political uncertainty, we have cut our earnings forecasts by 12% to Bt15bn for FY13 and by 22%, to Bt18bn for FY14. We now expect the bank to set heavier loan loss provisions for both years. BAY will soon start work on consolidating its operation with the Bangkok branch of the Bank of Tokyo-Mitsubishi UFJ (as required under the BOT's "one presence rule"). That consolidation will eventually involve new capital-raising, so a 15% EPS dilution (BAY will issue 1.1bn new shares at a price of Bt39 apiece). Thus, we maintain our HOLD rating.

Bank anticipates lending growth of 11% in FY13 and 9% in FY14

BAY guides for 4Q13 loan growth of 3-4% QoQ (it was 7.1% YTD in 9M13), led by corporate business, mortgages and personal loans. As such, the bank should achieve 11% lending expansion for FY13 (a little below its earlier target of 12%). Management currently targets FY14 loan growth of 9%, led by corporate and SME business and housing mortgages (we currently assume 10% loan growth for both FY13 and FY14 in our model). Note that BAY said business consolidation with BTMU will take 12 months (including due diligence) and the accounts won't be consolidated till FY15.

LLPs to rise

The bank plans to set normal LLPs in 4Q13 after heavy loan loss provisioning of Bt3.1bn in 3Q13 and Bt5.9bn in 2Q13, due to a surge in defaults on HP for used cars. Based on its guidance, we expect 4Q13 provisions of Bt2.4bn, down by 25% QoQ and 18% YoY. BAY expects its NPLs to equal 2.5% of gross loans at YE13. Management guides for a rising LLP-setting trend in FY14 and FY15. Hence, we have increased our LLP assumptions by 20percent for FY14 to Bt15bn and by 27% in FY15 to Bt14bn.

BAY's FY13 earnings will be lower than our earlier estimates

We forecast that BAY will post a 4Q13 profit of Bt4.1bn, up by 10% YoY and 9% QoQ, premised on loan growth of 3% QoQ and 10% YoY, a QoQ decline in NIM to 4.1%, fee income growth of 6% YoY and 1% QoQ. We now expect loan loss provisioning of Bt2.3bn for the quarter; we previously assumed only Bt1.5bn.

Consolidation will be completed by the end of FY14

As noted above, ahead of YE14 BAY plans to issue and sell 1.1bn new shares in order to finance the purchase of the Bangkok branch of its new parent company, BTMU. It will mean 15% EPS dilution in FY15 (but it will also mean new income from the BTMU Bangkok branch's portfolio). Over the long-term, there should be scope for corporate and SME business growth, chiefly with Japanese companies with operations in Thailand. We plan to attend a joint BAY-BTMU analyst meeting on January 17, 2014 before we make any further changes to our model or rating.

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