Mitsubishi UFJ to buy up to 75% of Thailand's Bank of Ayudhya

It'll be the first deal of its kind by a Japanese mega bank.

Japanese "mega bank" Mitsubishi UFJ's announcement that it is attempting to buy a majority stake of up to 75% in Thailand's Bank of Ayudhya (BAY) may mark a step-up in MUFG's overseas strategy, Fitch Ratings says.

Here's more from Fitch Ratings:

The acquisition would accelerate MUFG's offshore growth beyond its organic strategy in emerging Asia if successful, even though it is a small acquisition relative to the group's size.

The transaction is in line with our expectation for MUFG's strategy to expand in the Asian retail segment. We also consider it the best positioned of the three mega banks for further acquisitions, as its enhanced capital gives it more options for overseas growth.

If successful, this would be the first acquisition of a majority stake in Asia by a Japanese mega bank. A controlling holding would give MUFG a tighter grip on management, controls and reporting and the ability to merge the retail- and SME-focussed BAY with its own Thai branch, which concentrates on Japanese corporates, to generate synergies.

MUFG's results would receive a boost from the consolidation of BAY's earnings over time, especially if profitability synergies materialise through the development of the retail and corporate franchises.

The transaction is ratings neutral for MUFG because the immediate impact on the consolidated financial position, including its effects on capital, are limited. We expect the group's fully loaded Basel III common equity Tier 1 capital ratio of 11.1% at end-March 2013 to reduce by just 50bp-60bp as a result of the acquisition.

Quicker international expansion through an acquisition can raise both credit and operational risks, particularly if it brings exposures to unfamiliar customer segments and geographical markets.

MUFG's ambitions to enter Thai consumer lending through the BAY deal highlight a growing tolerance for risks as it pursues its offshore strategy.

BAY's 'BBB' rating could benefit from liquidity and capital support from a new owner if MUFG acquires a majority stake. BAY is Thailand's fifth-largest commercial bank by consolidated assets, with around 8% market share.

MUFG, one of Japan's three mega banks along with Sumitomo Mitsui and Mizuho, announced a strategic partnership with BAY through its wholly owned subsidiary, Bank of Tokyo-Mitsubishi UFJ.

This involves the acquisition of GE Capital's 25% stake in BAY, together with the intention to launch a tender offer to build a majority stake. The transaction is subject to regulatory and other approvals.