TRIS Rating has affirmed the company rating of Bank of Ayudhya PLC (BAY) at “AA-” and has affirmed the rating of BAY’s subordinated debentures at “A+”. The outlook remains “stable”. The ratings reflect BAY’s experienced management team, firm market position in its core business, improved financial performance and asset quality, and strong capital base. The ratings are also supported by the strong credit profile of GE Capital International Holdings Corporation (GECIH), the major shareholder which holds a 25% stake in BAY as of 26 September 2012. The ratings, however, are constrained by an increased exposure in high risk market sectors, an intensely competitive environment in the banking industry, and uncertainties in the domestic political situation and worldwide financial arena. These forces might pressure the bank’s business growth and profitability. The “stable” outlook reflects the expectation that BAY’s strong business and financial performances are maintained, and further improve its asset quality in the medium term. In addition, TRIS Rating expects BAY will be able to further strengthen the bank’s franchise value in the long term.
TRIS Rating reported that BAY is the fifth-largest Thai commercial bank in terms of total assets, with 8.4% market share in assets, 8.9% share in loans, and 7.5% share in deposits as of June 2012. BAY’s total consolidated assets reached to Bt1,034.5 billion by the end of June 2012, up by 9.2% from the level in December 2011. BAY continues to be the largest credit card issuer, the largest personal loan and sales finance services provider, the second-largest auto loan provider, and the largest provider of used car loans in Thailand. BAY has grown in two ways: organic growth and growth through acquisitions. The acquisitions have strengthened BAY’s market position in the retail banking and credit card segments, and diversified its retail loan portfolio by adding more high-yield loans (auto hire-purchase, credit cards, and personal loans). The past acquisitions included GE Capital Auto Lease PLC (GECAL) in 2008, AIG Retail Bank (AIGRB), AIG Card (AIGCC), and GE Money Thailand (GEMT) in 2009. Furthermore, in the first quarter of 2012, BAY successfully acquired and integrated Hong Kong and Shanghai Banking Corporation Limited’s Thailand retail banking business, comprised of a Bt13.9 billion loan portfolio, and a Bt9.6 billion in deposits. At the end of June 2012, BAY’s retail banking loans comprised 48% of total loans, up from 22% in 2007, while the portion of corporate loans to total loans fell from 34% in 2007 to 26%. Similarly, the portion of small and medium-sized enterprises (SMEs) loans to total loans declined to 26%, from 44% in 2007. However, the bank has more exposure to credit risk through its expansion into the retail lending sector. This sector may be especially vulnerable to in the event of severe economic downturn. And yet, BAY has a sufficient cushion of capital funds and allowances for doubtful accounts to absorb any unexpected deterioration in asset quality from such adverse changes.
TRIS Rating said, BAY has benefited from the know-how and operating systems transfers which came after forging the partnership with GE Capital. BAY succeeded in building the foundation and the banking platform for its future success. BAY has accelerated its growth by focusing on the full integration of the bank and its affiliated companies, and enhancing its cross-selling capabilities. These achievements are expected to strengthen the bank’s franchise value in the long term. In addition, the management team continues to concentrate on improving asset quality, enhancing operating efficiency, and growing its profitable assets.
BAY’s financial profile continues to improve, attributable to the following drivers: growth in profitable assets, efficiency improvement through control of operating costs, and reduction in credit costs. Net interest income and fee-based income rose in 2011; and, momentum continued to the first half of 2012. Earnings before tax in 2011 were Bt15.6 billion, up by 26.5% from Bt12.3 billion in 2010. However, the higher corporate income tax was recorded in 2011 arising from a Bt2.1 billion, revaluation of deferred tax assets and deferred tax liabilities due to the change in corporate income tax rate, effective in 2012. As a result, net profits increased slightly, rising by 5.4% to Bt9.3 billion in 2011, from Bt8.8 billion in 2010. Return on average assets (ROAA) in 2011 was 1.02%, slightly down from 1.07% in 2010. Return on average equity (ROAE) in 2011 was 9.18%, close to the level of 9.17% achieved in 2010. Nevertheless, for the first six months of 2012, BAY delivered net profits of Bt7.1 billion, or a 23.3% year-on-year (y-o-y) rise. Non-annualized ROAA and ROAE were 0.72% and 6.77%, respectively, up from 0.65% and 5.78% for the same period last year.
BAY has a strong risk management system in place to improve asset quality. As part of its continued efforts, BAY has succeeded in resolving its legacy non-performing loans (NPLs), as reflected by a steady decline in the NPL balance. By the end of June 2012, BAY’s NPLs totaled Bt24.2 billion, down substantially from Bt52.1 billion in 2009. The NPL to total loan ratio improved significantly, falling from 8.6% in 2009 to 3.2% as of June 2012. The bank’s NPL ratio in June 2012 was lower than the industry average of 3.4% for 11 Thai universal banks (excluding four non-listed Thai banks). At the same time, the non-performing assets (NPAs; the sum of classified loans more than three months overdue, plus restructured loans and foreclosed property) has been continually reduced over the past few years. The ratio of NPAs to total assets was 4.9% as of June 2012, a notable reduction from 10.1% in 2010, and 17.0% in 2009. BAY has a sufficient cushion of capital funds and allowances for doubtful accounts to absorb any unexpected deterioration in asset quality from adverse changes in the operating environment. At the end of June 2012, BAY’s NPAs were 0.35 times its capital funds plus the allowance for doubtful accounts. This ratio improved from 0.61 times in 2010 and is now well below the industry average of 0.48 times.
In terms of funding, BAY has diversified its sources of funding to better match its asset and liability structure. BAY has strived to increase the number of retail accounts in an effort to diversify its sources of funding. As of June 2012, the bank’s current and savings deposits (CASA), which is considered as a stable funding source for commercial banks, accounted for 39% of total deposits plus bills of exchange (B/Es), up from 33% in 2011. BAY’s liquidity position, however, was tight relative to its peers. The ratio of loans to deposits plus B/Es increased from 101% in 2011 to 105% by the end of June 2012. This ratio was higher than the industry average of 94%. If included debentures, instrument employed by BAY under its matched fund discipline, the ratio would be comparable to the industry. Meanwhile, liquid assets were only 20% of total assets, below the industry average of 28% in June 2012.
BAY has a solid base of capital funds. Because of the rapid expansion in lending during the past few years, the ratio of shareholders’ equity to total assets has declined, from 11.9% in 2009 to 10.8% in 2011 and 10.4% as of June 2012. However, the bank’s regulatory mandated level of capital funds remained sufficient to support its dynamic growth in the medium term. As of June 2012, BAY reported a Tier 1 ratio and total capital ratio (BIS ratio) of 11.51% and 16.00%, respectively, down from 11.85% and 16.29% at the end of 2011. These ratios in June 2012 remained above the industry averages of 10.39% and 14.84%, and also above the minimum requirement of 4.25% and 8.50% set by the Bank of Thailand (BOT), said TRIS Rating. — End
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