TRIS Rating has affirmed the company rating of Bank of Ayudhya PLC (BAY) at “AAA” with “stable” outlook. The rating is enhanced from BAY’s stand-alone credit profile to reflect its status as a highly strategic 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 synergies achieved from integrating its business with Bank of Tokyo-Mitsubishi UFJ Bangkok branch (BTMU Bangkok) in 2015 as well as potential future synergy. The stand-alone credit profile, however, is partially constrained by challenging market conditions, which may continue to pressure BAY’s credit cost and asset quality.
The “stable” rating outlook reflects the expectation that BAY will maintain its status as a highly strategic subsidiary of the MUFG Group and continue to receive a strong level of support from its parent bank.
The credit rating and/or outlook of BAY could change if the credit profile of the MUFG Group changes or if TRIS Rating’s view on the strategic importance of BAY to the Group changes.
BTMU is a wholly-owned subsidiary of MUFG, the largest financial group in Japan. BTMU became BAY’s major shareholder after it acquired a 72.01% stake through a voluntary tender offer in December 2013. After the integration of BTMU Bangkok with BAY on January 5, 2015, BTMU’s stake in BAY increased from 72.01% to 76.88%. The Ratanarak Group remains a key partner of BAY through its 20% stake. As of December 2015, BTMU was rated by Moody’s Investors Service (Moody’s) at “A1” with a “stable” outlook, and rated by Standard and Poor’s Ratings Services at “A+” with a “negative” outlook. BAY’s ratings reflect the expected support from its parent group in times of financial distress.
BAY is the fifth-largest Thai commercial bank in terms of total assets, with a 12% market share in loans and a 9.4% share in deposits as of June 2016. Loan growth of 13.5% on a year-on-year (y-o-y) basis for the third quarter of 2016 (Q3/2016) was driven by a strong growth in the corporate and retail – notably the housing – loan segments. Deposit growth of 7.2% in the same period was contributed by a significant increase of deposits in the savings account, including the high-yield savings products. One of BAY’s growth strategies is to offer a diversified product mix and 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 can further support its corporate clients by utilising BTMU’s overseas branch network to facilitate cross-border transactions and access to off-shore capital markets.
BAY’s overall asset quality has shown signs of improvement. Its credit costs were 1.74% in 2015, improving from 1.85% in 2014, but were still higher than the 2015 industry weighted average of 1.44%. Its non-annualised credit costs of 0.8% for the first half of 2016 (H1/2016) suggest an improving trend. Its non-performing loan (NPL) ratio was 2.3% as of September 2016, falling from 2.47% at the end of 2015. BAY has moderate exposure to the SME segment, which has been the most problematic segment with respect to loan delinquency. Its SME exposure accounted for 15% of its loan portfolio, which is considered moderate compared with those of some major Thai banks. However, it should be noted that the NPL ratios are net results of substantial bad debt write-offs; its bad debt write-offs for the first three quarters of 2016 (3Q/2016) amounted to Bt10,828 million, compared with Bt10,875 for 3Q/2015. In addition, special-mentioned (SM) loans as a percentage of the total loans have been rising, especially in manufacturing and trading sectors. BAY’s SM loans have increased from 3.7% at the end of 2015 to 4.2% as of Q3/2016. It has not yet been certain whether deterioration of the asset quality has already peaked in the current period.
BAY has recently achieved a strong growth in net profits relative to the industry. In 2015, BAY reported a net profit of Bt18,852 million, or a 19% y-o-y increase, taking into account the consolidation with BTMU. Growth in net profits remained high in 2016; BAY reported its net profits during H1/2016 at Bt16,641 billion, which was a 20.2% increase from the same period last year. The after-tax pre-provision profit has increased by 8% in 2015 and the amount during H1/2016 has increased by 11.2% y-o-y, compared with H1/2015. BAY’s profitability has been more or less on par with the industry despite the relatively high net interest margin it has achieved. Its return on average assets (ROAA) in 2015 of 1.29%, up from 1.2% in 2014, was comparable to the industry weighted average of 1.31%. The non-annualised ROAA during H1/2016 of 0.61% was comparable to the industry weighted average of 0.66%. Average profitability is due mainly to its relatively high credit costs and high operating expenses as a result of BAY’s proportionately large retail business. The bank’s operating expense is expected to remain relatively high, given its continued efforts to expand its branch network and recruit more staffs. Notwithstanding, BAY’s ability to generate profits reflects its competitiveness in this area. The interest spread of 3.71% for 2015 has been among the most favourable across the industry, thanks to the high earning asset yields of 5.71% and the lowering cost of funds of 2.08%. The net interest margins of 3.98% in 2015 were among the highest across the industry.
BAY’s funding structure includes low-cost wholesale funding from BTMU, which accounted for 14% of its total funding at the end of H1/2016. BAY sees the funding from BTMU as a source of stable funding, which TRIS Rating tends to agree based on the long history of funds being made available by the parent bank. This arrangement with BTMU is viewed to have enhanced BAY’s funding position, which would otherwise be viewed as a weakness given its relatively high loan to deposit including bills of exchanges ratio of 128% compared with the industry weighted average of 101% at the end of H1/2016. To match the medium-term fixed-rate loans in its hire-purchase business, BAY has been a frequent issuer of Thai baht debentures in the local capital markets. Its borrowings were 7.6% of its total funding as of H1/2016, compared favourably with the industry weighted average of 6.83% for the same period. BAY raised its current account savings account (CASA) funding ratio to 53% by the end of H1/2016, but that was still below the industry weighted average of 59%. The percentages of liquid assets to deposits of 30% as of H1/2016 were also lower than the industry weighted average of 43%.
Although BAY’s capital funds are well above the Bank of Thailand’s minimum regulatory capital adequacy requirements, they have appeared moderate compared with the industry. As of September 2016, BAY’s Tier-1 capital ratio and total capital adequacy ratio were 12.2% and 14.8%, respectively, compared with the industry weighted average of 14.85% for Tier-1 capital ratio, and 18.2% for total capital adequacy ratio.
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