Will BankThai cloud Thai privatization programme?

The pitfalls of sequential equity offerings are highlighted by BankThai''s difficulties.

The privatization of BankThai was completed this Monday in the face of a declining stock market, which severely dampened retail demand over the course of the deal's prolonged selling period.

Having consistently been Asia's best performing index of 2002, the SET finally started succumbing to global volatility a couple of weeks ago and has been on a downward trend ever since, though it still remains about 8% up on the year. This meant that while institutional books closed fully covered at the announcement of pricing on September 20, retail books closed 22% undersubscribed as the domestic tranches did not open for subscription until five days later, by which point a significant amount of retail interest had melted away.

Had the deal been run as a concurrent offering, on the other hand (with both books closing on September 20), specialists say the deal would have successfully closed fully subscribed and the underwriters would not have been left exposed to a week of "market risk." Indeed, it had initially been expected that domestic not international demand would form the bedrock of a deal, which saw the government reduce its stake from 96% to 49%.

As it was, the 297 million share general tranche (sold through syndicate brokers) closed with subscription for 193 million shares and the 194 million share retail tranche (sold through the two leads' branch networks) closed with subscription for only 91 million shares.

But in a neat solution to the problem, most of the 160 million share shortfall will be held as Treasury shares by BankThai itself, since its securities arm, BT Securities, was one of the two lead underwriters alongside Siam Commercial Bank. Officials say that the bank will absorb 122 million shares of the total shortfall, while SCB will take up the remaining 38 million shares. As a result some $130 million in shares were sold, with the government netting $168 million in proceeds.

Both banks are subject to a six-month lock-up. But under the terms of the original underwriting agreement, no syndicate member was obliged to pick up unsold shares if the SET fell below 350.

BankThai has also announced two further steps, which should provide additional critical support for the share price once trading resumes today (Wednesday).

Firstly, president Phirasilp Suphapolsiri has said the bank hopes to implement a 10% buy-back programme for up to 149.6 million shares by the end of the year. But before it can do so, it must clear a Bt870 million retained loss, with Suphapolsiri indicating this will have been achieved by the end of the third quarter.

However, while positive retained earnings marks a welcome step forward for the bank, the reversal looks like it will be the result of booking investment gains rather than through a growing and profitable loan book. Yet as analysts point out, shedding excess capital makes sense at a time of anaemic loan growth, since the bank's overall financial indicators will improve.

At the end of the first half, BankThai reported a high CAR of 21.75% and this should fall to 19.2% post buy-back. At the same time ROE and EPS will be enhanced, with analysts estimating that the latter, for example, will improve by Bt0.09 compared to Bt0.03 should the bank have lent the money out.

The second step concerns the payment of a dividend, which is unusual for the Thai banking sector and will only be possible if the BankThai can record accumulated retained earnings, implying a couple of quarters of positive earnings growth. The bank has said it will pay out a minimum of 40% of net profits, with analysts forecasting a likely yield around the 3.8% mark.

"Given the way markets are, BankThai has come up with quite an elegant solution and we expect the shares to perform," says one Thai specialist. But the lacklustre response to what was always a fairly small offering does not bode that well for the much larger and more complicated divestment of Krung Thai Bank, which is scheduled to follow before the end of the year.

Observers also note that most international demand did not constitute new money, but a lot of switches from existing holdings. "It was either a case of re-weighting the banking sector, or moving out of one of the larger banks in the hope of making a short-term trading gain," says one.

About 20 international accounts participated in the 707 million share deal and will be allocated 14% of the total. The institutional tranche, in which offshore investors participated, comprised 216 million shares and closed with subscription for 262 million shares. By geography, 75% were Asian accounts allocating money to their Thai funds and about 25% offshore US and European funds.

ING Bank was the sole international selling agent and outside observers conclude that it did well to secure and hold a solid order book at a time when the markets were starting to turn against it.

Pricing was fixed at Bt10.30 a share, at the bottom of the indicative price range. This represents a price to book valuation of 1.34 times (a large discount to the sector) and an 8.04% discount to the stock's Bt11.20 close before it was suspended.

BankThai was formed in 1998 following the amalgamation of Union Bank of Bangkok, Krngthai Thanakit and 12 finance companies. Some Bt88 billion of its Bt273 billion asset base is non-performing as the bank did not transfer out NPL's. Instead, the government insures about 71% of the bank's gross loans, enabling it to make some money from potential recoveries, while protecting it from expected losses.