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Bank of Ayudhya, BTMU team up to challenge Thailand's 'Big Four'

Bank of Ayudhya's customer counter

BANGKOK -- Bank of Ayudhya (BAY), Thailand's fifth-largest bank by assets, is set to catch up to the country's "Big Four" banks in both domestic and global operations under its new parent, Japan's Bank of Tokyo-Mitsubishi UFJ (BTMU). While demand for funds remains strong in Thailand, competition among financial institutions is intensifying. The major Thai and Japanese banks are joining forces with an eye on survival and the reorganization of the industry down the road.

     Following the 536 billion yen ($5.17 billion) purchase completed last December, the Bangkok branch of BTMU, the core banking unit of Mitsubishi UFJ Financial Group (MUFG), is integrating its operations with BAY under the brand name Krungsri.

     BTMU currently operates only one branch in Thailand but boasts the largest asset size among foreign banks in the country. When BTMU Bangkok's total assets of 520 billion baht ($15.9 billion) are added to BAY's 1.17 trillion baht, the gap between BAY and Kasikornbank, the fourth-largest player, will be halved.

     Market expectations are high. BAY's share price has shot up by more than 16% in the past year, a stark contrast to the nearly 9% decline of the benchmark index of the Stock Exchange of Thailand during the same period. Even though the gap between BAY and Kasikornbank remains relatively large, the backing of Japan's largest banking group is drawing attention to the Thai bank's future performance.

     For the time being, BAY's focus will be on enhancing its ability to attract deposits. Currently the value of loans at BAY exceeds deposits. This is due to the strategy taken under its former parent, GE Capital, the financial arm of General Electric of the U.S. GE Capital bought a 25% stake in 2007 that was later raised to 33%. Since then, BAY has expanded its assets by boosting its auto loan and consumer finance activities.

     As a result, BAY is burdened with costs from raising funds in the market. If the bank can boost deposits, its profitability will dramatically improve.

     There are a number of issues that BAY can address immediately, taking advantage of the beefed up capital from MUFG.

Branch gap

"BAY lags far behind the Big Four banks in terms of the number of ATMs and branches," Passakorn Linmaneechote, senior analyst at Macquarie Securities (Thailand), pointed out in a telephone interview. ATMs and branches are essential to provide customers with access to banking services. BAY has only 4,730 ATMs bearing the Krungsri logo across the country, while the Big Four banks deploy more than 8,000 each. To absorb the low-cost money, BAY must move quickly to improve its relatively poor visibility in smaller towns.

     By improving its fundamentals stemming from deposit growth, BAY will be able to seek more opportunities in loans targeting small and midsize enterprises. Currently, the bank ranks fifth in this bracket of loans.

     Noriaki Goto, BAY's CEO, said BTMU's corporate lending network would give the Thai bank a boost. Goto, formerly an executive officer at BTMU, became CEO in January, a position that had been occupied by an official from GE Capital. Goto had worked in the U.S. for the previous seven years and had worked on the partnership with BTMU's U.S. affiliate, Union Bank.

     In September 2012, GE Capital sold 8% of its shares in BAY, sparking speculation that the U.S. company was looking for an exit. This attracted MUFG and other foreign banks that were looking for a foothold in Thailand, the second-largest economy in Southeast Asia after Indonesia. Several banks were reported to be interested, but BTMU, which had even approached Prime Minister Yingluck Shinawatra when she visited Japan in May 2013, won approval.

     The top lender for small and midsize businesses in Thailand is Kasikornbank. The bank is especially strong in agricultural and franchise businesses. BAY's strategy will be to utilize BTMU's connections with Japanese automobile and electric appliance manufacturers and eventually reach out to their local suppliers and dealers.

     BTMU's Bangkok branch has a total loan portfolio of 200 billion baht, most of which is loans extended to Japanese firms. Goto said that in terms of corporate lending size, BTMU is not far behind the Big Four banks.

     BAY targets loan growth from small businesses at 16% and midsize ones at 14% in 2014. The Thai banking industry as a whole is seeing high growth. Outstanding loans are increasing at a pace of around 10% every year. A Bangkok-based analyst said, "There is a good chance that BAY will get more Japanese small and midsize clients if it provides good rates and services."

     Another plan BAY has laid out is to cultivate the upper level of its current retail services. Today BAY's retail business is centered on low- and middle-income people, but the bank wants to reach out to wealthy clients as well. It aims to increase the combined assets managed under a private-banking service called Krungsri Exclusive by 15% in 2014 to 370 billion baht.

     While larger banks are also bolstering similar services in response to the nation's growing household income, BAY hopes to cover a wider range of customers. The minimum asset level required to receive private-banking services at BAY is 5 million baht, a lower bar compared to its rivals, which have minimums of 10 million to 50 million baht.

     Although BAY does not have an insurance arm in its group, it hopes the private banking expertise of BTMU, along with its American partner Morgan Stanley, will bring it an advantage.

Foreign challenges

Overseas operations are another challenge. As more and more Thai companies expand abroad, Thai banks are racing to finance them. However, no bank has yet established a definite lead. BAY may have the chance to step ahead of its rivals by leveraging BTMU's experience in global banking.

Bank of Ayudhya's head office

    BAY and BTMU are seeking to complement each other overseas. In places where BTMU already has an established network, such as the U.S. and Hong Kong, BAY can introduce Thai-based companies to BTMU. In Southeast Asian countries where BTMU does not yet have a solid presence, the two banks can work together to support both Thai and Japanese companies.

     "I want our employees at BAY to learn how BTMU and MUFG are competing in the global market and feel confident that we can now share their platform to support the globalization of Thai companies," Goto said.

     The brand and credibility of MUFG may help BAY seek larger deals. BTMU's Bangkok branch financed Thailand's largest retailer Central Group in 2011 in its 260 million euro (about $335 million at that time) takeover of Italian department store La Rinascente.

     Although the banking market is expected to keep growing, analysts expect to see a wave of reorganizations among the 16 commercial banks, just like in Japan, where there were once more than 20 large banks, but now so called megabanks count only three.

    Teaming up with BTMU, BAY needs to remain in the leading group to stand clear of such reorganizations. Goto has vowed to bring BAY "a step closer" to the Big Four Thai banks.

     "It is highly probable that BAY will close the gap," stressed Passakorn of Macquarie Securities. He predicted that "although it depends on their strategies, it won't take longer than four to six years for them to catch up in asset size."

     Woraphon Wiroonsri, an analyst at Thai-based Maybank Kim Eng, said, "It will take time and is not easy." BAY and BTMU have to overcome Thai and Japanese cultural differences to capitalize on their partnership. Goto said, "There are many differences from the way we do things in Japan, but the difference is small compared to the U.S., where I worked for the last seven years."

Integration work

At BAY headquarters by the Chao Phraya River in Bangkok, more than 100 workers from BTMU and BAY are working toward the integration, to be completed by the end of this year. Teams are working on various issues, from credit management to the design of letterheads. Some discussions continue past midnight.

Bank of Ayudhya and MUFG team members gather to discuss integration procedures at Bank of Ayudhya headquarters in Bangkok.

    "Running a bank is not just about achieving some ratio or number. The foundation is important," Macquarie Securities' Passakorn said. But all in all, he appreciates the new partnership. "It will be interesting if BAY really challenges the Big Four and triggers a change in the market."

     Integrating some operations, such as e-banking, may start as soon as summer.

     Already, business cards of BAY employees are being printed with the new logo. It is the same Krungsri yellow circular symbol on a gray background, but with the words, "A member of MUFG, a global financial group" and the MUFG symbol printed below it.

     BAY recently unveiled its plan to construct a 37-story office building in central Bangkok. The skyscraper will reflect the company's ambition and determination to meet the challenges of the expansion to come.

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