Backed by Morgan Stanley as financial advisor, Thai Military Bank (TMB) is expected to access the public equity markets during the third quarter with a 2 billion to 3 billion rights issue raising up to Bt10.8 billion ($253 million). Thai experts believe it will be the first but not the last of the major banks to try and access the equity markets this year as the sector seeks to re-finance expensive hybrid capital undertaken at the height of the financial crisis.
According to UBS Warburg estimates, five domestic banks may seek to raise as much as Bt37 billion ($868 million)from the equity markets to re-finance Bt132 billion ($3.09 billion) in hybrid capital, which becomes callable between January and June 2004. The instruments known as Capital Augmented Preferred Securities (Caps) and Stapled Limited Interest Preferred Stocks (Slips) were issued in 1999, with Bangkok Bank raising Bt46 billion ($1.07 billion), Thai Farmers Bank Bt40 billion ($940 million), Bank of Ayudhya Bt26 billion ($609 million), Thai Military Bank Bt13.2 billion ($310 million) and DBS Thai Danu Bank Bt 6.7 billion ($157 million).
And as Warburg points out, these securities have been particularly costly for the banks since they carry interest rates of 11% to 11.25% versus prevailing deposit rates of 1.5% to 1.75%.
A number of the banks including Bangkok Bank and Thai Farmers are said likely to re-finance as much as they can through retained earnings. However, TMB also has to set aside new loan loss provisions, which its current capital base cannot support.
Last week, the bank announced that shareholders had approved a 6 billion share capital increase to put it back on a sound financial footing and is optimistic the process can be wrapped up by the summer. Key will be the speed with which negotiations are concluded between TMB and ANZ, which is front running talks to take a 20% stake in the bank.
The Australian banking group has publicly stated its interest in the stake and experts believe that a price around book value of Bt3.6 per share is being discussed.
The current re-capitalization plan envisages a 2 billion to 3 billion share rights offering, with ANZ taking up a further 2 billion shares and the IFC up to 500 million shares.
The World Bank's private sector arm had originally indicated its interest in a stake of up to 30%, with the intention of using TMB as a platform for its activities in the Asian region. However, local sources say this is no longer being considered and if the IFC participates in the re-capitalization at all, it will be for a much smaller financial stake of up to about 5%.
Other domestic fund management companies including Krung Thai Asset Management have also expressed interest in stakes of up to 5%.
In total the re-capitalization would raise Bt23.04 billion ($540 million) based on the bank's current share price of Bt3.84, or Bt21.6 billion ($506 million) if it is completed flat to book value. TMB currently has 4 billion shares outstanding and a market capitalization of roughly $350 million, of which 22% is in freefloat ($78 million). Major shareholders include the Thai government with a 49.8% stake, the Thai military on roughly 15%, National Finance on 3.8% and the Shinawatra family, which holds about 3.75%. .
With a share price currently down 6.8% on the year, the stock has underperformed the sector and analysts believe a successful re-capitalization will prompt a re-rating. As Credit Suisse First Boston said in a research report earlier this month, "If ANZ does take a stake and obtains effective management control and if the equity raising is successful, then we could be looking at a fair value range of Bt3.8 to Bt4.6."
Aside from the need to re-finance the hybrids, the bank has also said that it needs to set aside a further Bt7.8 billion ($183 million) in new provisions by the end of June 2003 to meet Bank of Thailand regulations. At the end of the first quarter, NPLs stood at 13.28% and the bank has said it hopes to get the figure below 10% by the end of the year.
However, analysts say that it has typically had a high relapse rate of 17% for restructured loans, which has not changed over the past two years. In terms of ROE and NIM it also records the lowest rates of any of the big six banks.
High provisioning meant that TMB recorded a net loss of Bt160 million in 2002 compared to a net profit of Bt655 million in 2001. During the first quarter, it returned to profitability, with with a net profit of Bt959.7 million.
Analysts say TMB has a wide branch network (360) and big deposit base, but needs a management overhaul. CSFB concludes that, "ANZ would be genuinely useful in terms of skills and systems. The bank has been focused mainly on corporate loans, but has started expanding in mortgages from last year. ANZ would supply expertise in consumer banking."
If the bank manages to complete its equity offering, it will mark the first deal from the sector since a $130 million deal for BankThai led by ING last October. Since then, the government has tried to push forwards with a roughly $500 million divestment in Krung Thai Bank, but found the market unreceptive when it conducted pre-marketing last November via Merrill Lynch.
