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Bank of Ayudhya

Undervalued, but still faces downside risk Neutral

Bank of Ayudhya Plc (BAY)

- 4Q13 preview. Management guided to 2013 loan growth of ~11% (vs. 8.7% 11M13 YTD), below the bank's target of 12%, but higher than our original forecast of 9%. In 4Q13, loan growth came primarily from corporate loans, with a negative growth in auto loans and net interest margin (NIM) narrowed slightly QoQ on the back of a higher proportion of low-yield corporate loans. 2013 fee income growth is estimated at 14-15%, in line with target. Cost to income ratio is estimated at ~49% in 2013, above the 48% target. Provisions are expected to remain prudent. NPLs are expected to be stable or ease QoQ on the back of a Bt1.5bn sale of NPLs. We forecast a 4% YoY and 3% QoQ rise in 4Q13 earnings to Bt3.9bn.

- 2014 preliminary targets. BAY's management provided preliminary 2014 top line targets. Loan growth target is 9%, with management estimating sector 2014 loan growth of 8-9%. We believe this target is too optimistic and maintain our forecast of 7%. Management expects NIM to slip, with fee income growth in the low teens. Note that the targets may be fine-tuned later by the new CEO, Mr. Noriaki Goto, who will join the bank on January 2, 2014.

- Merging with BTMU Bangkok. The Bank of Tokyo-Mitsubishi UFJ Limited (BTMU) successfully acquired 72.01% of BAY through a voluntary tender offer (VTO), which was completed on Dec 13, 2013. The next step is the merger with the Bangkok branch of BTMU, which is expected to complete at the end of 2014. BAY will issue up to 1.5bn new shares priced at Bt39 in exchange for the assets of the Bangkok branch of BTMU. Based upon the latest due diligence, management believes BAY will need to issue 1.1bn shares for this purpose.

- S-T ROE dilution. BTMU Bangkok had assets of Bt571bn (50% of BAY's assets) and loans of Bt218bn (~24% of BAY's loan portfolio), as of October, 2013. As of FY2012 (ending March 2013), BTMU Bangkok NIM was ~2%, below BAY's 4.2%, as it has high exposure to low-risk corporate loans and interbank assets. BTMU Bangkok FY2012 net profit was Bt4.2bn, equal to 28% of BAY's 2013F earnings. We preliminarily estimate that this will dilute ROE to ~13percent from 15-16% now for at least 1-2 years. Longer term, we believe synergy with BTMU will offset any dilution.

- Will not de-list. Current BAY shareholder structure: 72.01% by BTMU, 25% by the Ratanarak group and 3% by minority shareholders. Though the free float is only 3% and does not meet the free float requirement, BAY expects to remain qualified for SET listing, as the holding by the Ratanarak group is divided into several related entities. The BoT also gives a 3-year waiver for not meeting free float requirement. BAY has no intention of de-listing.

- Maintain Neutral. We maintain Neutral on BAY with unchanged target price of Bt39 (1.8x average 2013F and 2014F BVPS). BAY is slightly undervalued, but we still see some downside risk from the slowing economy as a result of political unrest.




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