Bangkok--15 Jan--Moody's
Moody's Investors Service has upgraded the Bank of Ayudhya Public Co Ltd's ("BAY") bank financial strength rating to
"D-" from "E+". The upgrade concludes Moody's review of BAY's ratings for possible upgrade as announced on May 31, 2006. No debt or deposit ratings have been affected. The outlook for all ratings is stable.
"The upgrade of BAY's rating reflects the benefits accrued from the acquisition of a strategic stake in BAY by GE Group-owned GE Capital International Holdings Corporation ("GECIH"), as well as the continued improvement in the bank's creditworthiness," says Leo Wah, a Moody's Assistant Vice President/Analyst.
According to Wah, also Moody's lead analyst for BAY, GECIH's acquisition of 1,391 million new shares in BAY at the end of December 2006 and the exercise of outstanding warrants - which will expire in August 2008 and are currently quite deep in the money - by existing shareholders (including the major shareholder Ratanarak family), could double the
bank's tier-1 capital base from approximately Bt37 billion as at end-November 2006. In fact, GECIH's investment alone has already restored BAY's economic solvency, even when stressed for possible additional loan
losses.
The increase in current regulatory capital to approximately 17% following GECIH's investment and warrant conversion so far would allow BAY to strengthen its balance sheet by raising provisions against non-performing loans ("NPL"), while also allowing the bank to write off bad debts more aggressively and support its strategy to expand its retail banking business. The bank's balance sheet is relatively weak, with a 13% NPL ratio and a 33% loan loss reserve - both worse than the average for
Thailand's rated commercial banks.
Moreover, with only 14% of BAY's loan portfolio in retail banking, GE Group's individual business expertise in product design, system, collection, and most importantly risk management would certainly support BAY's strategy of seeking a more balanced and healthier loan portfolio.
Moody's also expects GE Group's best practice in risk management to be adopted.
"We foresee more rapid improvements ahead thanks to GE Group being involved in the management of the bank while also adding its strength in retail business to the mix, which may lead to further upgrades in the future," notes Wah.
However, Moody's will closely monitor developments which could adversely affect ratings in the future. These include: 1) the expansion of BAY's loan book and in particular individual lending, as over-aggressiveness in a volatile operating environment would negatively affect credit quality; 2) possible negative consequences in the event of a drastic overhaul in the management team as GE Group has the right to appoint senior executives; and 3) any possible surge in NPLs, which may more reasonably reflect real asset quality due to different classification or due diligence with possible new risk management systems in place.
"Despite the upgrade of BAY's rating, neither its debt nor deposit ratings have been affected," adds Wah. "This is because the bank's existing Baa3 senior debt and deposit ratings already reflect potential extraordinary government support under our existing methodology."
BAY, headquartered in Bangkok, is Thailand's sixth largest bank by deposits assets. As of June 30, 2006, it had total assets of Baht 646 billion (US$ 17 billion).
Hong Kong
Leo Wah, CFA
Asst Vice President - Analyst
Financial Institutions Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121
Singapore
Beatrice Woo
VP - Senior Credit Officer
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308