Bank of Tokyo-Mitsubishi UFJ likely to merge its Thai branch with Bank of Ayudhya after acquisition

But getting substantial shareholding is still uncertain.

Standard & Poor's Ratings Services said that it had placed its 'BBB-' long-term and 'A-3' short-term counterparty credit ratings on Bank of Ayudhya Public Co. Ltd. (BAY) on CreditWatch with positive implications.

"We also placed our 'axA-' long-term and 'axA-2' ASEAN regional scale ratings on the Thailand-based bank on CreditWatch with positive implications."

Here's more from S&P:

"We placed the ratings on CreditWatch to reflect our expectation that BAY could benefit from potential parent group support if Bank of Tokyo-Mitsubishi UFJ Ltd. (BTMU) acquires a substantial stake in the bank," said Standard & Poor's credit analyst Ivan Tan.

BTMU is the main operating bank of Mitsubishi UFJ Financial Group Inc. (MUFG) and proposes to acquire a majority stake in BAY by the end of December 2013.

The proposed acquisition fits with MUFG's strategy to be one of the leading retail banking groups in Asia. The group can benefit from growth opportunities in Thailand, particularly because many Japanese manufacturers have operations there. BAY would also contribute positively to MUFG's revenue and profit. The potential for greater strategic importance hinges on the integration of BAY into the group and the financial support that MUFG may extend to BAY.

However, it is uncertain if BTMU will be able to get substantial shareholding in BAY as part of its offer. The acquisition is also subject to approval from regulatory and corporate authorities in Thailand and Japan.

On July 2, 2013, BTMU signed an agreement with GE Capital International Holdings Corp. to acquire its 25.33% stake in BAY. BTMU will launch an offer in early November to acquire shares from other shareholders at Thai baht 39 per share.

We understand that BTMU is likely to merge its Thailand branch with BAY after the acquisition. This branch's asset base is about 50% of BAY's asset base and could impact BAY's stand-alone credit profile (SACP). That said, we do not have full details of the operations of BTMU in Thailand, or the acquisition plans.

"We aim to resolve the CreditWatch within the next six months once we have more clarity on BTMU's proposed acquisition and the impact of BAY's merger with BTMU's Thailand operations," said Mr. Tan.

We could raise the ratings on BAY if: (1) BTMU acquires a substantial stake in BAY and ascribes high importance to BAY; and (2) BAY's SACP does not deteriorate materially.

Conversely, we could affirm the ratings if we no longer believe that the proposed acquisition is likely to happen, or if BAY's SACP deteriorates substantiality post the merger. We believe such deterioration in SACP is unlikely.