banking & finance

Evolution: The next episode

The Thai banking landscape continued to evolve in 2007, driven by new regulations to upgrade domestic standards and foreign investments in local institutions.

The year saw a number of major partnerships between local and foreign banks: Bank of Ayudhya with GE Capital, BankThai with TPG Newbridge, Thanachart Bank with ScotiaBank, and TMB Bank with the ING Group.

The deals offered local partners access to capital, technology and know-how as the Bank of Thailand continued to tighten the country's regulatory infrastructure. New rules and regulations, such as the consolidated supervision programme, the adoption of International Accounting Standard 39 and the Basel II capital accord, and the introduction of limited deposit insurance, were major milestones for the sector in 2007.

Bank of Ayudhya's tie-up with long-time retail partner GE Capital was first announced in August 2006. By the end of September 2007, GE had taken a 32.8% stake in BAY on a fully diluted basis, with the Ratanarak family's holdings reduced to just 25.1%.

GE Money Retail Bank was closed and assets were transferred to the Thai bank, which also announced the acquisition of GE Capital Lease, a local auto hire-purchase provider.
BAY's vision is an ambitious one, with a target to be "Thailand's most admired universal bank" and achieve a return on equity (ROE) of more than 20% by 2010. The bank is Thailand's fifth largest in terms of asset and deposit size, with a 9% market share in loans and deposits.

More surprising to market watchers was the first-quarter deal between Thanachart Bank (TBANK) and Scotiabank. The Canadian-based bank took a 24.98% stake in Thanachart Bank by acquiring 157 million shares from Thanachart Capital and another 276 million in new shares issued by Thanachart Bank.

The share sale was priced at 16.37 baht per share, or 1.26 times the book value per share. The 7.1-billion-baht deal helped boost TBANK's capital adequacy ratio to 12.9% at the end of September from 11.1% at the end of 2006. ScotiaBank now holds 24.98% of TBANK, with TCAP holding the remainder.

ScotiaBank also has an option to boost its shareholding to 49% by purchasing additional bank shares from TCAP at a price of 1.6 times book value up until the end of 2008.

TMB's deal was closed only after months of speculation and delay. The country's sixth-largest bank in assets had planned to raise 35 billion baht in capital as early as late 2006 in anticipation of higher loan-loss provisioning needs to comply with the IAS 39 standard.

ING Bank emerged as a surprise investor after talks between the Finance Ministry and Singapore's DBS Bank, TMB's two largest shareholders, collapsed over disagreements in pricing, as well as management control.

Under the recapitalisation plan approved by shareholders in November, ING will take a 25.2% direct shareholding in TMB and another 4.92% stake through non-voting depository receipts, paying 1.6 baht per share for 13.11 billion shares. ING will also have the right to boost its shareholding to as much as 35% over the next five years.

Existing shareholders, including the Finance Ministry, will be offered a rights issue at 1.4 baht per share, with 0.4941 new shares offered for every one share held. The ministry's shareholdings will be diluted to 26.11% from 31.18%.

The 37.62-billion-baht recapitalisation will help boost TMB's capital adequacy ratio to 17.93% at the end of 2007 from 10.16%. TMB also announced that it would set aside 25 billion baht in new provisions in its fourth-quarter financial statements and also tighten its loan classification standards.

BankThai's recapitalisation plan was similarly convoluted and troubled, particularly after it emerged that the bank was the sole Thai institution to have invested in US sub-prime mortgage assets.

In the first half of the year, BankThai floated a 32.88% stake at 4.17 baht per share, or 1.3 times book value, to private equity firm TPG NewBridge and co-investors Blum Capital and Marathon Asset Management.

The 3.05-billion-baht capital increase gave TPG Newbridge, Blum and Marathon a shareholding equivalent to that of the Financial Institutions Development Fund, and helped raise the bank's capital adequacy ratio to around 9%, or just slightly higher than the regulatory minimum of 8.5%. Executives said a second round of recapitalisation would then be made to raise capital to 14% of risk assets.

But the recapitalisation plan was stalled after the bank posted second-quarter losses of 1.56 billion baht, largely due to loan-loss provisions set against non-performing loans to President Agri Trading and to cover losses in its offshore investments in collateralised debt obligations.
Terms for its capital increase were changed three times over the year. In May, the bank had proposed floating 2.24 billion new shares at 3.46 baht each, which was later changed in October to 4.44 billion shares at 1.73 baht each and a par value of 3.75 baht. The plan was changed a third time in December to a subscription price of 1.36 baht per share, which bank executives said was necessary to adjust for the bank's lower market share price and higher provisioning burden to cover its CDOs.

In 2008, two other banks - Siam City Bank and ACL Bank - are expected to see significant shareholding changes.

Siam City Bank, now 47.5% controlled by the FIDF, is looking for a strategic partner to help bolster its IT and risk-management platforms. For ACL Bank, the bank's major shareholder Bangkok Bank is looking to divest its 19.3% stake to China's ICBC. But the deal has been delayed pending approval of the new Financial Institutions Act, which will raise foreign shareholding limits to 49% from 25% now.

From a performance standpoint, most Thai banks reported weaker earnings for the first nine months of 2007, owing to higher loan-loss provisioning charges.
According to the Stock Exchange of Thailand, net profits for the first nine months totalled just 10 billion baht for listed bank stocks, compared with 21.9 billion in profits for the same period last year.

But for 2008, profitability is expected to rebound, thanks to lower provisioning requirements and a projected pickup in loan growth to 7.5% to 10%.