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+” with “positive” outlook. The ratings reflect BAY’s stable market position in its core business, improved financial profile and asset quality, and strong capitalization. The ratings, however, are constrained by increased risk from greater exposure in high risk market segments, and transition risk arising from a potential change in the shareholding structure of the bank’s major shareholder. Intense competition in the banking industry, and the uncertainty of the global economy, might affect BAY’s future growth and profitability. The “positive” outlook reflects the expectation that BAY will benefit from a stronger business profile and an improving financial performance, after merging with The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU)-Bangkok Branch. The outlook also reflects the likelihood that BAY’s ratings will be enhanced from its stand-alone rating. Should BTMU succeed in becoming BAY’s parent bank through majority control of BAY, BTMU’s stronger credit profile may enhance BAY’s ratings.
Following a plan to become BAY’s strategic partner, BTMU intends to acquire a majority stake in BAY through a voluntary tender offer. The voluntary tender offer is expected to be completed by the end of December 2013. GE Capital International Holdings Corporation (GECIH), one of BAY’s major shareholders, will tender its entire shareholding of 1,538 million shares (or a 25.33% stake in BAY) to BTMU. In addition, in accordance with the one-presence policy of the Bank of Thailand (BOT), BTMU-Bangkok Branch will be integrated with BAY once the voluntary tender offer is complete. To complete this integration, BAY will issue not more than 1,500 million common shares in a private placement to BTMU to exchange for the transfer of the assets and liabilities plus all the commercial operations of the BTMU-Bangkok Branch to BAY. The integration of BTMU-Bangkok Branch with BAY will help strengthen BAY’s business profile and financial position. The integration will give BAY a more diverse loan portfolio, a larger deposit base, and a more stable base of capital. Furthermore, BAY is expected to lower its cost of funds, and have more opportunities to cross-sell its financial products to a larger customer base. If the share acquisition and business integration succeed as planned, BTMU will become BAY’s largest shareholder, with a stake that may range from 40% to 80% depending on the success of the voluntary tender offer and the capital increase. As a strategically important subsidiary of BTMU, BAY is expected to receive financial support from BTMU, if necessary. TRIS Rating will continue to monitor the progress of these transactions.
BTMU is the major bank in Mitsubishi UFJ Financial Group Inc. (MUFG), the largest financial group in Japan. As of June 2013, BTMU was rated by Moody’s Investors Service at “Aa3”, and rated by Standard and Poor’s at “A+”. Both rating firms have assigned a “Stable” outlook to BTMU.
BAY was the fifth-largest Thai commercial bank in terms of total assets, with 9.0% market share in loans and 7.5% share in deposits as of June 2013. Since 2008, BAY has grown in two ways: organic growth and growth through acquisitions. The acquisitions have strengthened BAY’s market position in the retail banking segment, and diversified its retail loan portfolio by adding more high-yield loans (used car hire-purchase, credit card, and personal loans). BAY’s loan portfolio has continued to expand, rising by 15% year-on-year (y-o-y) in 2012, and 4% year-to-date as of June 2013. At the end of June 2013, BAY’s loan portfolio comprised retail loans (51% of total loans), corporate loans (24%), and small- and medium-sized enterprises or SME loans (25%). BAY currently has more exposure to credit risk through its rapid expansion into the retail lending segment. This segment is especially vulnerable to economic downturns.
BAY has a good risk management system. Thanks to its continuing efforts, BAY has succeeded in resolving its legacy non-performing loans (NPLs), as reflected by a steady decline in the NPL balance. At the end of June 2013, BAY’s NPLs totaled Bt22.8 billion, down from Bt52.1 billion in 2009. The ratio of NPLs to total loans fell from 8.6% in 2009 to 2.6% as of June 2013. However, in a weaker economy, the bank’s asset quality may deteriorate, if many retail loans start to become NPLs. Nonetheless, 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 economy. As of June 2013, BAY’s non-performing assets (NPAs; the sum of classified loans more than three months overdue, plus restructured loans and foreclosed property) were 29% of the sum of its regulatory capital plus the allowance for doubtful accounts. This ratio was better than the industry average of 37%.
BAY’s financial performance continues to improve. The improvement is attributable to the following drivers: growth in net interest income and non-interest income, and efficient control of operating costs and credit costs. In 2012, BAY delivered a net profit of Bt14.7 billion, or a 58% y-o-y rise. Return on average assets (ROAA) in 2012 was 1.45%, up from 1.02% in 2011. However, in the second quarter of 2013, BAY strengthened its loan loss reserves by setting aside a countercyclical resource of Bt2.6 billion in the event of a potential slowdown in economic or business activities. As a consequence, net profit for the first half of 2013 was Bt7.1 billion, close to the same amount BAY earned in the first six months of 2012. Non-annualized ROAA was 0.65%, slightly down from 0.72% for the same period last year.
BAY has a solid base of capital funds. The bank’s regulatory capital is sufficient to support its expansion efforts in the medium term. As of June 2013, BAY reported a Tier 1 ratio and total capital ratio (BIS ratio) of 12.03% and 17.02%, respectively. These ratios were far above the minimum requirements of 6.00% and 8.50%, respectively, set by the BOT.
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