Bangkok--9 Jun--TRIS Rating
TRIS Rating Co., Ltd. has affirmed the company rating of Bank of Ayudhya PLC (BAY) at “A” and has also affirmed the rating of BAY’s Bt12,000 million subordinated debentures (BAY13NA) at “A-” with “stable” outlook. The ratings reflect the proven track record of BAY’s capable and experienced management, support from its major shareholder, continuing improvement in its financial performance, and increasing franchise value with good brand recognition following its success in organizational re-engineering activities. The ratings also take into consideration BAY’s improving position in the retail lending business, leading to a better mix of its wholesale and retail loan portfolios. However, these strengths are partially offset by a less favorable economic and business environment and a low cushion of capital fund and allowance for loan loss against bad debts, which might limit the bank’s business expansion and profitability.
The “stable” rating outlook recognizes the improvement in BAY’s financial and business performance. BAY’s profitability is expected to be sustained, supported by the bank’s enhanced franchise value under the universal banking platform, which is expected to support the bank’s business and revenue diversification and cost efficiency. BAY is also expected to make progress in resolving its remaining non-performing assets (NPA), and increasing provisioning to a level greater than the Bank of Thailand’s (BOT) minimum requirement, in order to be in line with the industry average.
TRIS Rating reported that BAY is the sixth largest commercial bank in Thailand in terms of assets, with 9% market shares of both loans and deposits. BAY’s major shareholder is the Ratanarak family, which held 37% of the bank’s shares as of April 2006. The bank has coped with tough competition in the banking sector by implementing several re-engineering activities since 2004, which has enhanced BAY’s franchise value and has established good brand recognition. To come up with a universal banking platform, BAY directly owns companies engaging in various types of financial services, such as securities, fund management, leasing, hire purchase, factoring and credit card businesses. BAY’s success in utilizing group synergy has yet to be proved.
TRIS Rating said, BAY has reported favorable profitability since 2003, led by the reduction in cost of funds and increases in non-interest income. BAY’s cost of funds fell sharply after its restructuring of funding sources by replacing its high-cost subordinated debentures, including its Stapled Limited Interest Preferred Shares (SLIPS) worth Bt26,000 million, with new equity and cheaper long-term subordinated debentures. This improved the bank’s net interest spread substantially.
However, BAY’s profitability remained pressured by intense competition in the banking, leasing and securities businesses and its need for additional provisioning, due to its lower than industry average cushion of allowance for loan loss.
Regarding GE Capital Asia Pacific Ltd.’s subscription plan in BAY’s newly-issued ordinary shares, TRIS Rating will make a full-scale review of BAY’s ratings after the recapitalization transactions are completed. The ratings might be revised upward if BAY could be able to utilize the synergy from both parties’ strengths to enhance the bank’s franchise value and to improve its competitive position, and/or if there were the significant improvement of BAY’s capitalization due to new capital injection.