, Subordinated Debt Ratings at “A+”, and Hybrid Debt Ratings at “A”, with “Stable” Outlook
TRIS Rating Co., Ltd. has assigned a “A+” rating to the proposed issue of up to Bt11,000 million in subordinated debentures of Thanachart Bank PLC (TBANK). At the same time, TRIS Rating has affirmed TBANK’s company and senior debenture ratings at “AA-”. TRIS Rating has also affirmed the ratings of TBANK’s subordinated debentures and hybrid debt capital securities at “A+”, and “A”, respectively. The outlook remains “stable”. 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 line of 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. These strengths, however, are constrained by a high level of legacy non-performing assets (NPAs), and the intensely competitive environment in the banking and securities industries. Uncertainties in the domestic political situation 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 the 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 (BOT). 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 latest accounting 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 will not severely and immediately affect the banking industry.
TRIS Rating reported that at the end of March 2012, TBANK was the sixth-largest Thai commercial bank as measured by total assets, with 7.9% market share in loans and 6.3% share in deposits. TBANK is also the largest auto loan provider in Thailand, with around 26% market share and Bt303.6 billion in loans as of March 2012, 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 March 2012, TBANK’s corporate loans represented 37% of total loans, up from 22% in 2009, while retail loans were 63% 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 wide 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, in 2010, TBANK’s financial profile improved after the merger with SCIB. Consolidated net income was Bt8,777 million in 2010, up by 116% year-on-year (y-o-y). 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 to Bt7,671 million in 2011, down by 13% y-o-y. 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. For the first quarter of 2012, TBANK reported net profit of 1,772 million, down by 20% y-o-y. Although fee-based income rose, the weaker performance was mainly due to lower net interest income and higher operating costs, when compared with the same period last year. Non-annualized ROAA and ROAE were 0.20% and 2.32%, respectively, lower than the levels 0.26% and 3.06% attained in the same period of 2011. 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. TBANK has strived to improve the asset quality by resolving its legacy NPLs. At the end of March 2012, the NPLs to total loans ratio was 5.58%, an improvement from 6.06% in 2010. However, TBANK may face a rise in NPLs in the aftermath of the heavy flooding in Thailand in late 2011. The management team’s ability to control asset quality during the post-merger consolidation period remains to be proved.
TBANK now has more diverse sources of funding after the acquisition. The sources of funding better match its asset and liability structure. Nonetheless, now TBANK has lower liquidity as loans grew faster than the amount of new funds. The ratio of loans to adjusted deposits (deposits plus bills of exchange (B/Es)) has continually increased, rising from 90.4% in 2010 to 97.3% in 2011, and to 100.1% as of March 2012. TBANK’s capital base was strengthened after a capital injection of Bt35.8 billion made by TCAP and BNS in 2010. The shareholders’ equity to total assets ratio climbed from 6.44% in 2009, to 8.29% in 2010, and to 8.62% at the end of March 2012. TBANK’s Tier-1 capital ratio and capital adequacy ratio as of March 2012 were 9.58% and 14.11%, respectively. These ratios remain below the industry averages of 10.39% and 14.89%, respectively, for 11 Thai universal banks (excluding four non-listed Thai banks). However, the ratios are above the minimum requirements of the BOT, which are 4.25% and 8.50%. TBANK had a relatively lower level of capital funds and allowances for doubtful accounts to serve as a cushion against bad debts. As of March 2012, TBANK’s NPAs were 0.7 times the amount of capital funds plus the allowance for doubtful accounts, which was above the industry average of 0.5 times, said TRIS Rating. — End
Company Rating: Affirmed at AA- Issue Ratings: TBANK133A: Bt2,072.1 million (up to Bt5,500 million) senior debentures due 2013 Affirmed at AA- TBANK155A: Bt5,000 million subordinated debentures due 2015 Affirmed at A+ TBANK194A: Bt2,000 million subordinated debentures due 2019 Affirmed at A+ TBANK196A: Bt10,000 million subordinated debentures due 2019 Affirmed at A+ TBANK204A: Bt6,000 million subordinated debentures due 2020 Affirmed at A+ TBANK197A: Bt3,500 million hybrid debt capital securities due 2019 Affirmed at A TBANK247A: Bt1,500 million hybrid debt capital securities due 2024 Affirmed at A Up to Bt11,000 million subordinated debentures due within 2022 A+ Rating Outlook: Stable
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