TRIS Rating has affirmed the company rating of Bank of Ayudhya PLC (BAY) at “AAA” and has affirmed the rating of BAY’s subordinated debentures at “AA+”. The outlook remains “stable”. The ratings are enhanced from BAY’s stand-alone credit profile to reflect its status as a strategically important member of Mitsubishi UFJ Financial Group (MUFG). The stand-alone rating is based on BAY’s stable market position in its core business and the potential synergy from integrating its business with Bank of Tokyo-Mitsubishi UFJ (BTMU) Bangkok branch (BTMU Bangkok) in 2015. The rating, however, is partially constrained by BAY’s deteriorating asset quality from weak operating environment. The “stable” outlook reflects the expectation that BAY will continue to receive strong business and financial support from its parent group, as a strategically important subsidiary of MUFG. The outlook also takes into consideration the expected improvement in BAY’s business profile after it merges with BTMU Bangkok.
BTMU is a wholly-owned subsidiary of MUFG, the largest financial group in Japan. BTMU became a major shareholder of BAY after it acquired a 72.01% stake in BAY through a voluntary tender offer in December 2013. After a successful integration of BAY and BTMU Bangkok on 5 January 2015, MUFG’s ownership in BAY through BTMU increased from 72.01% to 76.88%. Meanwhile, the Ratanarak Group remains a key partner with approximately 20% holding of BAY’s shares. As of December 2014, BTMU was rated by Moody’s Investors Service at “A1” with “stable” outlook, and rated by Standard and Poor’s at “A+” with “stable” outlook. BAY’s ratings reflect the expected support and benefits it will receive from its parent group.
BAY is the fifth-largest Thai commercial bank in terms of total assets, with a 9.2% market share in loans and a 7.6% share in deposits as of June 2014. The integration of BAY and BTMU Bangkok will strengthen BAY’s business profile, securing its leadership position in consumer finance and expanding its market share for corporate and SME banking. BTMU Bangkok’s loan portfolio comprises mostly high-quality corporate loans, which will complement BAY’s strength in high-yield retail lending. The loan portfolio will grow by about one-fourth and will be more balanced after the merger. BAY will also have more opportunities to cross-sell its financial products to a larger customer base. BTMU Bangkok’s strong relationships with large Japanese corporations in Thailand can help connect BAY to a large number of employees working for these corporations and to Thai SMEs in these corporations’ supply chains.
BAY’s asset quality was slightly impacted by the slowing economy, which resulted in rising non-performing loans (NPLs) in all segments, especially SME. NPLs rose from Bt21 billion (2.6% of total loans) at the end of 2012 to Bt35 billion (3.5%) in September 2014. The rise was despite the sale of Bt5.4 billion worth of NPLs during that period. BAY’s NPL coverage ratio and the ratio of allowance to the Bank of Thailand’s (BOT) minimum requirement, once stronger than peers, dropped to levels below industry averages. As of September 2014, BAY’s non-performing assets (NPAs; the sum of classified loans more than three months overdue, plus restructured loans and foreclosed property) were 34% of the sum of its regulatory capital plus the allowance for doubtful accounts, slightly below the industry average.
In 2013, BAY delivered a net profit of Bt12 billion, an 18% year-on-year (y-o-y) decline. Return on average assets (ROAA) in 2013 was 1.1%, down from 1.5% in 2012. The decline was mainly caused by rising credit cost in 2013. Excluding the credit cost, BAY’s pre-tax, pre-provision profits (PPP) in 2013 grew 15% y-o-y. For the first nine months of 2014, non-annualized ROAA and return on average equity (ROAE) were 0.86% and 8.3%, respectively, lower than industry average but comparable among the banks of similar scale of operations.
In terms of funding and liquidity, BAY’s ratio of loans to deposits plus bills of exchange (B/E) has been weaker than peers. As of September 2014, the ratio was 118% for BAY, compared with less than 100% for the industry average. BAY relies more on long-term borrowings as a funding source, relative to peers, due to the higher proportion of fixed-rate long-term hire purchase loans in its loan portfolio.
BAY has a solid base of capital funds. The bank’s regulatory capital is sufficient to support its expansion efforts over the next few years. As of September 2014, BAY’s common equity Tier 1 ratio, Tier 1 ratio, and total capital ratio (BIS ratio) were 11.2%, 11.2%, and 14.9%, respectively. These ratios are sufficiently higher than the minimum requirements of 4.5%, 6%, and 8.5% set by the BOT, respectively.
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