Krung Thai Bank begins pre-marketing

Merrill Lynch launches pre-marketing for a roughly $500 million government divestment.

Pre-marketing begins today (Wednesday) for a three billion share offering in Krung Thai Bank, representing 27% of the lender's issued share capital. However, while the government has been clear about its strategic goal, the lead is said to be taking a very cautious and pragmatic approach and intends to keep most of the deal's details including its launch schedule as fluid as possible.

This is hardly surprising given the renewed threat of hostilities towards Iraq and poor performance of ever single Thai bank deal since the Asian crisis. But at the same time, the current schedule allows no room for slippage this side of Christmas, since roadshows are provisionally scheduled to start on November 22, for pricing on December 10 and listing on December 23. Co-leads are ABN AMRO, CLSA and JPMorgan.

In an admission of the challenges the privatization faces, the government has already taken a decision not to reduce its shareholding down to 49% in a single sale. At the moment it owns a 91.77% stake, of which 87.23% is held by the Financial Institutions Development Fund (FIDF), 3.75% by the Ministry of Finance and 0.79% by the Government Housing Bank. The remainder is in freefloat, with foreign investors holding about 3% and capped at 25%.

Since the middle of October, the impending privatization has weighed on the bank's share price and it closed yesterday at Bt8.05. Based on a 2002 book value per share of Bt5.7, the bank is currently trading at 1.4 times. Analysts say the Thai banking sector is averaging about 1.5 to 1.6 times price to book and a number believe Krung Thai should come at least 30% cheaper to its main rivals Bangkok Bank and Thai Farmers Bank. On this basis, the new deal would be priced at 1.1 to 1.2 times and at roughly Bt6 to Bt7 per share.

In the deal's favour, the Thai equity market has been Asia's best performer year-to-date, rising roughly 17%. Thai banks, with the exception of Krung Thai, have also been strong performers, with Bangkok Bank up 30%, Thai Farmers up 24% and Siam Commercial up 47%. Krung Thai, down 24.06% year-to-date, has partly underperformed as a result of the share overhang, but also because it has such a small free float and investors have been uncertain how the government intended to deal with a huge overhang of warrants owned by the FIDF

Representing 43% of the bank's equity on a fully diluted basis, the warrants were granted in 1998 in return for Krung Thai NPL's. The FIDF was granted 10.8 billion 10-year warrants convertible on a one-for-one basis at a strike price of Bt10 per share.

In September, Krung Thai announced a plan to restructure its share capital that should be finalised by December. This involves re-purchasing the warrants for Bt6.6 billion ($154 million) and taking a direct hit on its shareholders equity. And as UBS Warburg writes in a recent research report, "We think Krung Thai is getting a good deal. Using a Black Scholes model, we estimate the fair market value of the warrants at roughly Bt21 billion."

At the same time, the bank is also taking steps to extinguish the accumulated losses which prevent it from paying a dividend. It will do so by reducing the par value of its shares from Bt10 to Bt5.15 and writing off the ensuing surplus against the losses. Banks are not allowed to pay a dividend until they have shown a couple of quarters of positive retained earnings. Nevertheless, analysts say that Krung Thai and possibly BankThai should be the first from the sector since the financial crisis to start paying dividends.

Krung Thai's most immediate predecessor, BankThai received a disappointing reception from retail for its IPO in mid-September and the experience will almost certainly weigh on the new deal. Retail books, for example, closed 22% undersubscribed and the shares have also not really performed since listing at Bt10.3. They closed yesterday around the Bt9.75 level, a 5.34% drop.

Analysts says Krung Thai, Thailand's second largest bank by assets, deposits and loans, is viewed as a far less complex proposition than the much smaller BankThai. But they add that its equity story is clouded by its standing as the government's main lending arm to state-owned enterprises. And although it now has one of the lowest NPL ratios of the banking sector (2% target by year end), many worry that a government-directed push to stimulate lending growth will impair asset quality and push NPLs back up.

Some bankers, however, believe that while rival commercial banks complain that Krung Thai's aggressive growth strategy is depressing margins they will be avid supporters of the IPO. As one explains, "All the big banks will actively push this IPO out through their retail networks. It's in all their interests to make sure Krung Thai becomes privately-owned as soon as possible. They want to see the bank starting to run itself in the interests of shareholders rather than say an upcountry farming co-operative."