TRIS Rating Co., Ltd. has affirmed the company rating of Secondary Mortgage Corporation (SMC) at “A+” with “stable” outlook. The rating is enhanced from SMC’s stand-alone rating by the strong governmental support, as SMC is a special financial institution (SFI) and is 100% owned by the Ministry of Finance (MOF). The corporation has a mission to promote the secondary mortgage market. SMC has a competitive advantage from special legal and regulatory support and tax privileges under the Emergency Decree on Secondary Mortgage Finance Corporation B.E. 2540. Although the composition of its board members has been well-designed to support its mission, the stand-alone rating is also constrained by SMC’s short track record to perform its mission due to the unfavorable environment for the secondary mortgage market and less competitive funding costs compared with commercial banks and other SFIs. The “stable” outlook reflects the expectation in the medium term that the management team of SMC will be able to improve operating efficiency continuously and acquire a sizable portfolio from KBANK as planned. The outlook also reflects the expectation that SMC’s relationships with the government and related state entities, along with the business and financial support from the government, remain unchanged in the future. Also, it is expected that SMC will get both direct and indirect support from the government to amend related laws, and stimulate demand for mortgage-backed securities.
TRIS Rating reported that SMC was incorporated in 1997, under the Emergency Decree on Secondary Mortgage Finance Corporation B.E. 2540, with initial capital of Bt1,000 million. Under the Act, the government can guarantee the debt issuance of SMC up to four times the amount of capital. In January 2009, the MOF injected Bt100 million of new capital into SMC. SMC’s board of directors is composed of the representatives from both private sector and governmental entities including the Fiscal Policy Office, Bank of Thailand (BOT), Securities and Exchange Commission (SEC), Government Housing Bank (GHB), and Land Department, together with no more than four qualified persons and SMC’s managing director.
TRIS Rating said, the purpose of the establishment of SMC is to create a secondary mortgage market and the availability of long-term fixed rate mortgage loans provided to home owners. SMC then pools mortgage loans to create mortgage-backed securities, and sell the securities to investors. However, an unsupportive environment has limited SMC’s growth prospects since commercial banks have not faced liquidity shortage, have strong capital base, and prefer to retain mortgage loans in their portfolios. Mortgage loans generate high margins and have low risk weight compared with other types of consumer loans and commercial loans.
SMC’s investment in mortgage loans have grown continuously since inception, rising from Bt350 million in 1999 to Bt4,520 million in 2005. However, in late 2005, SMC detected irregularity in the loan acquisition process. SMC actively resolved the problem loans in 2006 and 2007 through non-performing loan (NPL) sale and ceased all new business acquisition. After the NPL sale, the amount of the outstanding loans reduced from B4,520 million in 2005 to Bt1,997 million in 2007.
During 2007 and 2008, SMC revamped its business processes, reorganized its management systems, and developed internal systems. By the end of 2007, SMC appointed a new managing director and some key managers. Since 2009, SMC has been developing information technology along with risk management and internal control systems to enhance its operating efficiency in the long term. At the same time, improvement of staff competency is also crucial to enhance loan servicing and monitoring quality according to the business growth plan.
During 2009-2010, SMC allied with three financial institutions to offer long-term fixed rate mortgage loans. The new business channel established outstanding loans to SMC, about Bt170 million as of December 2010, and increased to about Bt330 million as of June 2011. However, the cooperation among SMC and GHB, by transferring a sizable portion of housing loans portfolio to SMC, has not been executed as planned in 2010. SMC’s portfolio, therefore, further declined from Bt1,768 million in 2008 to Bt1,626 million in 2009, and Bt1,543 million in 2010, before slightly increasing to Bt1,572 million as of June 2011 due to additional increase in loans from the alliance financial institutions. Recently, SMC signed a memorandum of understanding (MOU) to purchase loans of up to Bt5,000 million from KASIKORN BANK PLC (KBANK) within 2011, hence, SMC’s portfolio is expected to largely expand.
Due to the rise in NPLs, SMC posted a loss of Bt329 million in 2007, following annual losses of Bt99 million in 2006 and Bt120 million in 2005. After a write-off of Bt318million in 2007, the ratio of NPLs to total loans fell from 39.8% in 2006 to 6.9% in 2007. The ratio increased to 8.9% in 2008 and jumped to 16% in 2010 to June 2011, which was far higher than the average level of 4.8% for all 15 universal banks and 5.8% for the six SFIs in 2010. However, 60% of its NPLs were loans acquired in 2004, while 2% were loans acquired in 2009 and 2010.
In 2008, SMC reported a Bt22 million net profit after a three consecutive yearly losses, and also reported Bt26 million of net profits in 2009. In 2010, net profits was only Bt0.3 million due to an increase in bad debt and doubtful accounts to comply with IAS39 and a decline in operating income. For the first half of 2011, net profits recovered to Bt8.7 million as an increase in average interest spread and only Bt1 million expense for bad debt and doubtful accounts, due to the ability to maintain asset quality. A majority of SMC’s funding base was short-term promissory notes (77% of total funding). SMC’s cost of fund was 3.2% (annualized) in the first half of 2011 compared with 2.4% in 2010. SMC still has less competitive funding costs compared with other financial institutions where deposit-taking from the public is allowed. As a result, SMC cannot offer long-term fixed rate products to home buyers at the attractive rate, said TRIS Rating. -- End
Company Rating: Affirmed at A+ Rating Outlook: Stable
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