Following last November's successful flotation of PTT, the Thai government has re-started its ambitious privatization programme with plans to sell 47% of BankThai through the public equity markets. The price range was set this weekend at Bt10.30 to Bt12.30 per share, representing a 2.4% to 18.3% discount to Friday's Bt12.6 close.
The range has been deliberately kept wide, but most Thai experts nevertheless expect pricing to fall towards the bottom end of the range given the government's strategic aims for the roughly $200 million offering and the difficulties of marketing the Thai banking sector to investors. With a large number of state assets being prepared for sale and a one year gap since the last divestment, the Thai government knows it is critical to build positive momentum by making BankThai a success.
As such it appears to have made a very sensible decision of leading the new divestment calendar with a small deal and relatively clean asset in the hope of opening the way for much larger and more difficult sales to follow, including a $1 billion plus divestment of Krung Thai Bank.
"The FIDF has been very accommodating with BankThai, as it's not a lot money in the scheme of things, but very important that it go well," says one specialist.
Siam Commerical Bank and BankThai are lead managers of the 707 million share offering, with ING Bank acting as sole international selling agent. International roadshows finished last week and the stock is now being marketed to domestic investors. With the setting of the price range, international books are effectively now open, with formal domestic institutional bookbuilding to take place between September 19 to 20 and pricing scheduled to be announced at the weekend. A fixed price retail offer will then take place between September 25 and 26.
The offering has been split into three tranches, with an institutional tranche of 216 million shares, a retail tranche of 194 million shares (available through the two lead banks' branch networks) and a general tranche of 297 million shares (available through the syndicate). There is no greenshoe or clawbacks.
The international offering will comprise 15% to 25% of the institutional tranche, equivalent to 106 million to 176 million shares. At the bottom end of the range, the offering will raise $169 million and at the top end $202.9 million, of which international investors could account for up to $50.5 million.
Year-to-date, BankThai has underperformed Thailand's SET Index. As of Friday's close, the stock was down 30% compared to a 17.52% increase in the overall index, Asia's best performing this year by some margin. For most of the year, the stock has been fairly range-bound around the Bt18 to Bt19 level and only started to fall in late June as plans for the government divestment became clear. Since then it has hit a low of Bt11.3 before rebounding over the past month-and-a-half.
Observers, however, say the current share price does not provide a wholly relevant benchmark since only 3% of shares are in freefloat. The rest are held by the FIDF, which oversaw the amalgamation of Union Bank of Bangkok, Krungthai Thanakit and 12 finance companies into BankThai in August 1998.
In terms of price to book, the bank is being marketed on a range of 1.34 to 1.6 times (based on a book value of Bt7.68). This represents a steep discount to the Thai banking sector, where large banks such as Bangkok Bank and Thai Farmers Bank are trading at respective levels of 2.1 and 2.2 times. Smaller banks such as Bank of Asia and DBS Thai Danu trade even higher at respective levels of 2.5 and 2.7 times.
Investors say that ING's research report assigns the stock a fair value range of Bt11.90 to Bt15.5. This is based on a cost-of-equity range of 12.3% to14.5% and an asset compounded growth rate of 17% for the first five years and 9.4% for the next five years, putting BankThai on a 1.4 to 1.8 times forecast 2003 book value.
Early reports suggest that the deal is likely to meet a much stronger reception from domestic than international investors, a worrying sign for Krung Thai Bank which needs to appeal to a wide audience to clear such a large amount of paper. The last major equity issue from the Thai banking sector was for Siam Commercial Bank in 1999 and observers comment that the painful memory of each of the three bank recapitalizations remains vivid in the minds of global funds, nearly all of which have been absent from the Thai market since then.
"The bigger funds have not been following Thailand very closely in recent years and their institutional memory of the country is not a good one," says one analyst. "This is the kind of deal that will appeal much more to dedicated Thai and Asian funds that have benefited from the stock market rally and are still bullish on the macro story."
Domestically, the stock is being pitched as an attractive pick-up to other investment alternatives such as bank deposits, which currently yield 2% to 3%. It is also being pitched as a defensive investment, with limited risk, but good upside potential.
While this may seem strange in the context of the huge "real" NPLs still entrenched in Thai banking sector, BankThai has an unusual if highly complex equity story. On the surface, Bt88 billion of its Bt273 billion ($6.38 billion) asset base is non-performing and 73% of the total stands in the loss category.
However, a government insurance scheme, unique to BankThai, covers most of the potential losses and also enables the bank to make some money from potential recoveries. The CAP scheme (Cover Asset Pool) was set up to compensate BankThai for taking over non-performing assets of the defunct finance companies and was a clever way to augment the bank's asset base, since its actual loan book of performing assets would be miniscule had the NPLs simply been transferred to the FIDF.
Indeed the small size of the bank, which only has a market capitalization of $438 million, is said to be the main concern highlighted by potential investors.
Under the scheme, the FIDF agreed to compensate BankThai for five years running to December 2005, in the process insuring around 71% of BankThai's gross loan assets. It also agreed to compensate the bank for loss of interest income on the CAP assets by paying a 1% yield over cost of deposits. As a result, BankThai has been able to maintain both a high ROE (10.9%) and high capital ratios (20.6%), since none of the impaired assets are risk weighted for capital purposes.
In its research report, investors say ING also argues that the bank is consequently better provisioned than most Thai banks, which still do not conform to international standards and some analysts estimate to be 48% short of required provisioning levels.
"BankThai's competitive advantage lies not so much in its lower proportionate NPLs, but in the bank's superior reserve coverage," analyst Paul Sheehan is said to have written. "At 65.7% of impaired assets, BankThai is well above Bangkok Bank's 27.5% as well as the six-bank average of 33.7%."
Unlike its major domestic competitors, BankThai is not geared to retail banking, but concentrates on the SME sector. But analysts argue that SMEs are a good indirect proxy to consumer growth rates and lead banks estimate that for every 1% growth in net loans, BankThai will be able to boost ROE by 01.6%.
