TRIS Rating Co., Ltd. has assigned a “AA-” rating to Thanachart Bank PLC (TBANK)’s proposed issue of up to Bt5,500 million in senior debentures. At the same time, TRIS Rating has affirmed the company rating of TBANK at “AA-” with “stable” outlook and has also affirmed the ratings of TBANK’s subordinated debentures and hybrid debt capital securities at “A+” and “A”, respectively. The ratings 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 has proven its capability in TBANK’s 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 (NPAs), the uncertainties surrounding the effects of the severe flooding in Thailand in late 2011, 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 at 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 subordinated to holders of the senior and subordinated debts of the bank. The bank will not be obliged to make an interest payment on the hybrid debt capital securities 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-wide synergies to strengthen its market position in the banking industry, and to control any deterioration in the quality of its assets. Sustainable revenue growth and the resolution of underperforming assets, as well as efficient cost control through group-wide synergies, will benefit TBANK’s 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 in 2011, TBANK was the sixth-largest Thai commercial bank, as measured by total assets, with 7.9% market share in loans and 6.0% share in deposits. TBANK is also the largest auto loan provider in Thailand, with around 26% market share and Bt286.5 billion in loans as of December 2011, including the hire-purchase portfolio of Thanachart Capital PLC (TCAP), its parent company. Following the merger with SCIB, TBANK smoothly transferred and assimilated all of SCIB’s businesses on 1 October 2011. After the merger, TBANK’s competitive edge has been strengthened, particularly in the corporate banking segment. The acquisition diversified TBANK’s loan portfolio 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 December 2011, TBANK’s corporate loans represented 38% of total loans, up from 22% in 2009, while retail loans were 62% 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 the range of financial services offered by Thanachart Group. 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.
TRIS Rating said, TBANK’s financial profile has improved. As a result of merger with SCIB, TBANK’s consolidated net income was Bt8,777 million in 2010, up by 116% from Bt4,056 million in 2009. The improvement was 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 1.00% and 16.48% in 2009. Nevertheless, in line with TRIS Rating’s projection for the post-acquisition business integration period, TBANK’s performance in 2011 was slightly worse when compared with 2010. Net profit fell by 13%, from Bt8,777 million in 2010 to Bt7,671 million in 2011. ROAA and ROAE in 2011 dropped to 0.87% and 10.37%, respectively. The falls were caused primarily by a narrower interest spread and greater provisions for loan losses, as well as higher operating costs. In 2011, the operating expenses to total income ratio climbed to 40.46% from 38.75% in 2010. Nonetheless, TBANK’s financial performance is expected to improve in the medium term once the post-merger 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 (NPLs) and NPAs (the sum of classified loans more than three months overdue, plus restructured loans and foreclosed property). The NPLs and NPAs were mostly from SCIB’s commercial loan portfolio. At the end of 2011, TBANK’s ratio of NPLs to total loans was 5.92%, a double level of 3.04% in 2009. At the same time, TBANK had NPAs worth 0.71 times the amount of capital funds plus the allowance for doubtful accounts in 2011, up from 0.31 times in 2009. TBANK had a lower level of capital funds and allowances for doubtful accounts to serve as a cushion against bad debts. However, the bank’s capital funds remained sufficient to absorb any unexpected deterioration in asset quality. 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 diverse sources of funding after the acquisition. The sources of funding better match its asset and liability structure. 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 December 2011, climbed to 8.52% from 6.44% in 2009. At the end of 2011, TBANK’s Tier-1 capital ratio and capital adequacy ratio were 9.28% and 13.72%, respectively, down from 11.71% and 14.75% in 2010. The drops were mainly the result of the expanding loan portfolio and the deduction of the goodwill from the bank’s amount of Tier-1 capital, said TRIS Rating. — End
Company Rating: Affirmed at AA- Issue Ratings: TBANK155A: Bt5,000 million subordinated debentures due 2015 Affirmed at A+ TBANK194A: Bt2,000 million subordinated debentures due 201 Affirmed at A+ TBANK196A: Bt10,000 million subordinated debentures due 2019 Affirmed at A+ TBANK197A: Bt3,500 million hybrid debt capital securities due 2019 Affirmed at A TBANK204A: Bt6,000 million subordinated debentures due 202 Affirmed at A+ TBANK247A: Bt1,500 million hybrid debt capital securities due 2024 Affirmed at A Up to Bt5,500 million senior debentures due within 2013 AA- Rating Outlook: Stable
TRIS Rating Co., Ltd./www.trisrating.com Contact: rapee@tris.co.th, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2012, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.