Fitch Ratings (Thailand) has affirmed AEON Thana Sinsap (Thailand) Public Company Limited's (AEONTS) National Long-Term Rating at 'A-(tha)'. The Outlook is Stable. Fitch also affirmed the National Short-Term Rating at 'F2(tha)' and the company's senior debt ratings at 'A-(tha)'.
KEY RATING DRIVERS
The affirmation reflects AEONTS' status as one of the largest non-bank consumer finance companies in Thailand with sound market shares in personal loans and credit cards. Significant competition occurs in Thailand's retail lending segment, including from larger institutions such as commercial banks. However, AEONTS has shown it can generate through-the-cycle profitability, including during difficult periods.
The operating environment remains challenging because of the ongoing effects of the coronavirus pandemic, which has led to increased unemployment and higher levels of household leverage. Still, downside risks have eased as the economic outlook for 2022 appears to be improving.
There remain some risks to asset quality, but Fitch believes that the company's high levels of provisioning (with loan loss allowance coverage of 309% as of November 2021) provide some buffer against unexpected deterioration in impaired loans. AEONTS has also continued to post consistent levels of profitability, with pretax income-to-average assets of 5.2% in its nine-month accounting period end-November 2021 despite high loan impairment charges.
AEONTS' key leverage ratios deteriorated in FY20 on a one-off impact from the implementation of TFRS9. That was substantially reversed in 2021, with the company's debt-to-tangible equity ratio improving to 3.6x by end-November 2021. Fitch continues to expect the company's earnings capacity to support internal capital generation, and for the company's capital to provide an important buffer against unexpected weaknesses in the operating environment.
Similar to other non-banks, AEONTS does not take deposits and hence there is some reliance on wholesale funding. Fitch believes that refinancing risks are mitigated by the company's record of sound banking relationships and ability to access debt capital markets.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Near-term upside is limited by the pandemic-induced weak operating environment, which results in some lingering uncertainties, particularly in terms of asset quality.
In the medium term, positive rating action would depend on Fitch's assessment of a more robust competitive position and improved business profile. This could be evidenced by stable or improving market positions in the company's consumer finance segments, along with sustained improvements in multiple financial ratios, such as in asset quality and earnings. For example, this may occur if Fitch expects the company's impaired loans ratio to be sustained at around 2.5% or below, with credit costs stabilising at pre-pandemic levels of below 7% of gross loans, combined with steady profitability and internal capital generation sufficient to support growth without stretching the leverage metrics.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
We may take negative rating action if the company's financial performance deteriorates significantly beyond Fitch's expectations, such as in a much weaker operating environment with multiple financial metrics being negatively affected. For example, there may be ratings downside if Fitch expects the impaired loans ratio to rise above 5% (November 2021: 3.7%) for an extended period, combined with limited buffers in terms of loan-loss allowances and capital.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com