TRIS Rating Co., Ltd. has upgraded the company rating of Thanachart Bank PLC (TBANK) to “AA-” from “A+” and has also upgraded the ratings of TBANK’s subordinated debentures and hybrid debt capital securities to “A+” and “A”, respectively, from “A” and “A-”. The outlook has been removed to “stable” from “positive”. The upgrades reflect TBANK’s stronger business profile after the successful strategic acquisition and smooth integration of Siam City Bank PLC (SCIB), a medium-sized bank with a large and more diversified client base. The ratings are enhanced by several factors. First, TBANK’s management team is experienced and capable in its core business, hire-purchase lending. Next, after the acquisition, TBANK now has an enlarged network and the appropriate business strategies to strengthen the synergies within Thanachart Group. Lastly, the ratings are enhanced by the strong credit profile of its Canadian strategic partner, Bank of Nova Scotia (BNS), which holds a 49% stake in TBANK. However, these strengths are constrained by the higher level of consolidated legacy non-performing assets (NPA), the uncertainties surrounding the effects of the recent severe flooding in Thailand, and the intensely competitive environment in the banking and securities industries. Uncertainties in the domestic political arena and the worldwide financial arena might limit the group’s expansion plans and future profitability.
The “A” ratings for TBANK’s hybrid debt capital securities (TBANK197A and TBANK247A) reflect both the subordination and payment deferral risks of the issues. The hybrid debt capital securities are cumulative, junior subordinated, unsecured, and due in 2019 and 2024. The securities are also callable by the bank any time before the maturity dates as long as the call date is at least five years after issuance and as long as the bank has received approval from the Bank of Thailand. The holders of the hybrid debt capital securities will be subordinated to depositors and holders of the senior debts and subordinated debts of the bank. The bank will not be obliged to make an interest payment if two conditions are met: the bank posts a net loss for the six-month period preceding an interest payment due date, and the bank is unable to pay a dividend during the six months preceding an interest payment due date. However, the coupon interest payments for the hybrid securities are cumulative.
The “stable” outlook recognizes TBANK’s designated role as the core bank of the Thanachart Group. TBANK is expected to capitalize on group synergies to strengthen its market position in the banking industry, and to control any deterioration in the quality of its assets. Sustainable revenue growth, resolution of underperforming assets, as well as efficient cost control through group-wide synergies will be benefit TBANK ratings. The outlook is also based on the expectation that the drop in the amount of deposit insurance coverage from Bt50 million to Bt1 million in August 2012, in accordance with the Deposits Protection Agency Act (DPA), will not severely and immediately affect the banking industry.
TRIS Rating reported that TBANK was the sixth-largest Thai commercial bank, as measured by total assets, with 8.3% market share in loans and 6.5% share in deposits as of September 2011. TBANK is also the largest auto loan provider in Thailand, with around 26% market share and Bt260.8 billion in loans as of June 2011, including the hire-purchase portfolio of Thanachart Capital PLC (TCAP), its parent company. Following the merger, TBANK smoothly transferred and assimilated all of SCIB’s businesses on 1 October 2011. After the acquisition of SCIB, TBANK’s competitive edge has been strengthened, particularly in the corporate banking segment. TBANK’s loan portfolio has been diversified across other industrial sectors. The diversification has yielded a better loan mix and has reduced the concentration of hire-purchase loans in the loan portfolio. As of September 2011, TBANK’s corporate loans represented 42% of total loans, up from 22% in 2009, while retail loans were 58% of the portfolio, down from 78% in 2009. In addition, TBANK benefited from acquiring the large deposit base and the physical branch network of SCIB. The acquisition will help support and enhance the extent of cross-selling of the range of financial services offered by Thanachart Group. Lastly, the acquisition is expected to strengthen TBANK’s franchise value in the medium to long term. However, TBANK’s ability to benefit from group-wide synergies has yet to be proved.
TBANK’s financial profile has continually improved. Net income was Bt8,777 million in 2010, up by 116% from Bt4,056 million in 2009. The improvement was mainly driven by a higher interest spread and lower credit costs, as well as greater fee-based income. Return on average assets (ROAA) and return on average equity (ROAE) in 2010 were 1.34% and 17.51%, respectively, up from 1% and 16.48% in 2009. Nevertheless, TBANK’s performance for the first nine months of 2011 slightly dropped compared with the same period of the prior year. The slight decline was in line with TRIS Rating’s projection for the post-acquisition business integration period. As a result, net profit for the first nine months of 2011 fell by 4% year-on-year, from Bt6,720 million in 2010 to Bt6,444 million in 2011. ROAA and ROAE for the first nine months of 2011 were 0.74% and 8.86% (non-annualized) respectively, below the industry averages of 1.11% and 11.57% for 11 Thai universal banks in TRIS Rating’s database (excluding three foreign-owned banks). The operating cost to total income ratio slightly increased from 38.8% in 2010 to 40.7% for the first nine months of 2011. This ratio was also higher than the industry average of 36.2%. Nonetheless, TBANK’s financial performance is expected to improve in the medium term once the integration process is complete.
In terms of asset quality after the acquisition of SCIB, TBANK has been constrained by an increase in non-performing loans (NPL) and NPAs (the sum of classified loans more than three months overdue, plus restructured loans and foreclosed property), mostly from SCIB’s commercial loan portfolio. At the end of September 2011, on a consolidated basis, TBANK’s ratio of NPLs to total loans was 6.31%, double the level of 3.04% in 2009, and above the industry average of 3.98%. At the same time, as of September 2011, TBANK had NPAs worth 0.61 times the amount of capital funds plus the allowance for doubtful accounts, up from 0.31 times in 2009, and higher than the industry average of 0.53 times. TBANK’s cushion of capital funds and allowances for doubtful accounts remained sufficient to absorb any unexpected deterioration in asset quality. However, the management team’s ability to control asset quality during the post-merger consolidation period has yet to be proved.
In terms of funding, TBANK now has more diversified sources of funding after the acquisition. The sources of funding better match its asset and liability structure. TBANK’s liquidity has improved, as the bank now has access to more retail deposits. The ratio of loan to adjusted deposits (deposits plus bills of exchange) was 97%, in line with the industry average of 96%. TBANK’s capital base was strengthened as a result of a capital injection of Bt35.8 billion made by TCAP and BNS in 2010. The shareholders’ equity to total assets ratio, as of September 2011, climbed to 8.3% from 6.4% in 2009. Despite the rise, this ratio is below the industry average of 9.3%. At the end of September 2011, TBANK reported a total capital adequacy ratio of 14.7% versus 14.1% in 2009. This ratio remains less than the industry average of 15.4%. Furthermore, the total capital adequacy ratio is expected to fall slightly, as the goodwill resulting from the acquisition of SCIB has to be deducted from TBANK’s Tier-1 capital once all of SCIB’s businesses are transferred to TBANK. -- End
Company Rating: Upgraded to AA- from A+ Issue Ratings: TBANK155A: Bt5,000 million subordinated debentures due 2015 Upgraded to A+ from A TBANK194A: Bt2,000 million subordinated debentures due 2019 Upgraded to A+ from A TBANK196A: Bt10,000 million subordinated debentures due 2019 Upgraded to A+ from A TBANK197A: Bt3,500 million hybrid debt capital securities due 2019 Upgraded to A from A- TBANK204A: Bt6,000 million subordinated debentures due 2020 Upgraded to A+ from A TBANK247A: Bt1,500 million hybrid debt capital securities due 2024 Upgraded to A from A- Rating Outlook: Stable from Positive
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