TRIS Rating Co., Ltd. has assigned the company rating of Ratchthani Leasing PLC (THANI) at “BBB+” with “stable” outlook. The rating reflects the company’s management team with extensive experience in the used car financing business, and the improvement of the operating process and risk management system. The rating also reflects improved financial performance and stronger market position after receiving business and financial support from its major shareholder, Siam City Bank PLC (SCIB). SCIB successfully completed a merger with Thanachart Bank PLC (TBANK) on 1 October 2011. In addition, the rating of THANI is enhanced from its stand-alone rating because the company is currently classified as a subsidiary of TBANK’s financial conglomerate of the Bank of Thailand (BOT)’s consolidated supervision regulations. At the beginning of November 2011, TBANK increased its share-holding in THANI to 65.2%. However, the rating is mitigated by concerns over intense competition and loan portfolio quality, as THANI has now focused on loans offering for commercial trucks. The “stable” outlook reflects the expectation that THANI’s experienced management team, improving operating efficiency, and support from its parent company will enable THANI to expand its loan portfolio in the targeted products and markets. The loan quality is expected to be controlled and maintained at an acceptable level. In addition, support from its parent company is expected to continue, especially the provision of credit facilities.
TRIS Rating reported that after a recapitalization in late 2006, THANI became an affiliate of SCIB. The company’s market position has improved. THANI could leverage its stronger capital base and funding from SCIB to finance an expansion of its loan portfolio. Outstanding loans rose substantially, climbing at an average annual growth rate of 53% during 2007-2010. The total loan portfolio increased from Bt1,775 million in 2006 to Bt10,404 million in 2010. The portfolio continued to rise in 2011, reaching a value of Bt11,879 at the end of September. The status as an affiliate of a commercial bank means THANI can receive a greater level of business and financial support from its parent bank compared with a stand-alone company.
TRIS Rating said, THANI’s shareholding structure has been affected by the merger of SCIB and TBANK. TBANK held 99.2% of SCIB’s shares after purchasing shares from the Financial Institution Development Fund (FIDF) in April 2010 and purchasing shares from investors through a tender offer in June 2010. In addition, TBANK succeeded with its Entire Business Transfer (EBT) project. The EBT project dealt with the transfer of all assets and liabilities of SCIB to TBANK on 1 October 2011. As a result, 48.4% of THANI’s shares were held by TBANK directly. TBANK is the largest provider of auto financing with a portfolio of outstanding auto loans worth approximately Bt270 billion as of September 2011. At the beginning of November 2011, THANI recapitalized through a rights offering. TBANK exercised its all rights while only few other shareholders exercised, causing the TBANK’s stake in THANI to increase to 65.2%. Therefore, THANI became TBANK’s subsidiary. TBANK now includes THANI as one of its subsidiaries on a full consolidation basis, consistent with the BOT’s consolidated supervision regulations.
Although THANI’s main business overlaps with TBANK’s auto loan business, the two companies have targeted different markets. The latest capital injection by TBANK implies that TBANK intends to have THANI focus on market segments which TBANK has not yet penetrated. During the past year, TBANK has helped THANI develop its underwriting and collection processes to improve operational efficiency. Various risk management policies have been implemented to comply with the standards required by TBANK. THANI has been supervised by its parent bank and parent bank’s regulator, the BOT.
The intense competition in the traditional used car loan markets has forced smaller firms such as THANI to seek new products and markets. THANI has been focusing its financial services on commercial truck loans since 2006. This segment constituted 52% of the company’s total hire purchase loan portfolio at the end of September 2011. THANI is trying to compensate for the increased risk in its new customer segment by charging higher interest rates, requiring high down payments, and calling for post-dated payment cheques. Although the loan quality of the commercial truck loan portfolio is currently acceptable, it remains a challenge to earn stable long-term risk-adjusted returns, after provisions for non-performing loans (NPL). THANI’s ratio of NPLs to average loans has fallen continuously from 5.9% in 2008 to 2.8% as of March 2011. The ratio rose slightly to 3.0% at the end of September 2011. The improvement in loan quality ratio was partly due to the significant expansion of the loan portfolio during the past three years. TRIS Rating remains concerned over the quality of this type of loan as THANI has the most experience in providing loans for used passenger cars and pick-up trucks.
Intensifying competition in the used car loan markets constrained THANI’s efforts to improve its interest yields, although the commercial truck loan portfolio generates better yields. Interest yields were 9.5% in 2008 and 2009, down from over 10% in previous years. Yields declined slightly to 9.4% in 2010. However, lower cost funding from the parent bank has enhanced THANI’s interest spread. The spread improved to 4.3% in 2010 from 4.2% in 2009 and 3.4% in 2008. In 2011, although the cost of funding dropped to 5.6% (annualized) for the first three quarters of 2011, yields tumbled to 8.7% (annualized) for the same period, slashing the spread to 3.1%. Since 2008, THANI has benefitted from two factors: changes in an accounting policy regarding the amortization and recognition of commission expenses, and from economies of scale. These two factors have raised THANI’s performance. The ratio of operating expenses to total income was 26.7% in 2009, down from above 30% in the years before 2008. The ratio decreased to 24.9% in 2010 and nosedived to only 12.8% for the first three quarters of 2011. Profitability has shown the corresponding improvements.
The company reported a net profit of Bt204 million in 2010, almost double the profit of Bt109 million in 2009. Net profit for the first three quarters of 2011 was Bt191 million, up 30.1% from the same period in 2010. The ratio of return on average assets (ROAA) also improved, rising to 2.5% in 2010 from 1.9% and 1.8% in 2009 and 2008. The ratio has been maintained at 2.4% (annualized) for the first three quarters of 2011. THANI’s capital base has deteriorated from the aggressive debt-funded portfolio expansion. The deterioration came despite a rise in paid-up capital from the exercise of warrants held by SCIB in late 2009 and despite improved operating performance in 2009 and 2010. The ratio of shareholders’ equity to total assets sagged from 31.4% in 2007 to 13.4% in 2010 and 12.2% at the end of September 2011. The latest recapitalization in November 2011 will strengthen the ratio to around 18% at the end of 2011. This level is adequate for THANI’s expansion plans for the next two to three years, under TRIS Rating’s scenario. THANI now has greater financial flexibility after becoming an affiliate of SCIB, which now is TBANK. At the end of September 2011, approximately 80% of total borrowings were from its parent bank, said TRIS Rating. -- End
Company Rating: BBB+ Rating Outlook: Stable
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