TRIS Rating Co., Ltd. has affirmed the company and existing senior debenture ratings of Ratchthani Leasing PLC (THANI) at “BBB+”. At the same time, TRIS Rating has assigned a “BBB+” rating to THANI’s proposed issue of up to Bt3,000 million in senior debentures. The outlook remains “stable”. The proceeds from the new debentures will be used to refinance THANI’s outstanding debts and expand its loan portfolio. The ratings reflect the extensive experience of the management team in the used car financing business, plus the continuous improvements in the company’s operating processes and risk management systems. The ratings also reflect THANI’s improved financial performance and stronger market position, after receiving business and financial support from its major shareholder, Thanachart Bank PLC (TBANK). The ratings of THANI are enhanced from its stand-alone rating, because the company is currently classified as a subsidiary of TBANK’s financial conglomerate under the Bank of Thailand’s (BOT) consolidated supervision regulations. However, the ratings are mitigated by concerns over intense competition and the quality of THANI’s loan portfolio as THANI now focuses on making loans for commercial trucks. This type of loan is more sensitive to any adverse changes in economic conditions.
The “stable” outlook reflects the expectation that THANI’s experienced management team, improving operating efficiency, and support from its parent bank will enable THANI to expand its loan portfolio in the market segments it has targeted. The loan quality is expected to be controlled and maintained at an acceptable level. In addition, support from its parent bank is expected to continue, especially the provision of credit facilities.
TRIS Rating reported that THANI’s shareholding structure has been affected by the merger of Siam City Bank PLC (SCIB) and TBANK. After the merger, 48.4% of THANI’s shares were held by TBANK directly. At the beginning of November 2011, THANI recapitalized through a rights offering. TBANK exercised all its rights while only few other shareholders exercised, causing 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. TBANK is the largest provider of auto financing loans in Thailand, with a portfolio of outstanding auto loans worth approximately Bt312 billion as of June 2012. Although THANI’s main business overlaps with TBANK’s auto loan business, the two companies have targeted different products and markets. The latest capital injection made by TBANK implies that TBANK intends to have THANI focus on market segments which TBANK has not yet penetrated. TBANK has helped THANI develop its underwriting and collection processes to improve operational efficiency. THANI has implemented a number of risk management policies to comply with the standards required by TBANK. THANI is in the process of changing its information technology systems to match TBANK’s systems. The company has been closely supervised by its parent bank and indirectly controlled by the BOT through the parent bank.
TRIS Rating said, after THANI became an affiliate of SCIB in 2006, the company’s market position has improved. THANI could leverage its stronger capital base and use funding from its parent bank to finance an expansion of its loan portfolio. Outstanding loans have risen substantially since 2006, 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, climbing to Bt12,483 million. THANI has more financial flexibility after becoming TBANK’s subsidiary. THANI can receive a greater level of business and financial supports from its parent bank which enhanced its competiveness and support business expansion. THANI, therefore, has been able to improve its market position continuously, as shown by the continued growth in its loan portfolio. The value of the portfolio stood at Bt15,232 million at the end of June 2012.
Competition is intense in the traditional segments of the used car loan markets. Smaller firms, such as THANI, has a disadvantage in terms of funding cost, when compared with larger leasing companies. As a result, THANI has sought new products and markets. THANI has been focusing its efforts on the commercial truck segment since 2006. This segment constituted 62% of the company’s total hire purchase loan portfolio at the end of June 2012. THANI compensates for the increasing risk in this 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 will remain a challenge for THANI to earn stable long-term risk-adjusted returns, after provisions for non-performing loans (NPLs). Commercial truck loans are considered sensitive to adverse changes in economic conditions. TRIS Rating remains concerned over the quality of this type of loan although THANI has had experience in providing loans for used passenger cars and pick-up trucks. In addition, the amount of commercial truck loans that THANI has granted has expanded substantially during the past three years. As a result, the quality of THANI’s loan portfolio needs time to be proved.
THANI’s ratio of NPLs to total loans has fallen continuously, dropping from 4.9% in 2008 to 2.8% as of September 2011. The improvement in the loan quality ratio was partly due to the significant expansion of the loan portfolio during the past three years. As with other auto financing companies, THANI was affected by the floods in Thailand during the last quarter of 2011. The NPL ratio to total loans soared to 3.7% at the end of 2011; higher loan loss provisions affected profitability. The NPL ratio improved to 3.2% at the end of June 2012.
Since 2008, THANI has benefitted from two factors: economies of scale and changes in an accounting policy regarding the amortization and recognition of commission expenses. The ratio of operating expenses to total income was 26.7% in 2009, down from more than 30% in the years before 2008. The ratio nosedived to 19.8% in 2010. The support from TBANK has helped THANI improve its operating efficiency. As a result, the ratio decreased to only 13.2% in 2011 and improved slightly to 13.0% for the first half of 2012.
THANI reported a net profit of Bt204 million in 2010, almost double the profit of Bt109 million in 2009. Net profit stayed steady at Bt205 million in 2011 due to the higher loan loss provision expenses, which came after the floods. The provision expenses rose to Bt126 million in 2011, from Bt40 million in 2010, mainly to serve as a cushion for higher NPLs. Profitability improved in the first half of 2012. Net profit was Bt177 million, 42.2% above the Bt124 million in profit reported for the first six months of 2011. Intensifying competition has constrained interest yields. However, THANI now has a lower cost source of funds because it can secure funding from its parent bank. THANI can also secure lower cost source of funds from the capital market, through the issuance of debentures and bills of exchange (B/E). The lower cost sources of funds have helped THANI maintain its interest spread at approximately 3% for the first half of 2012. The return on average assets (ROAA) was 2.6% (annualized) for the first half of 2012, improving from 1.9% in 2011 and 2.5% in 2010.
THANI’s capital base has deteriorated due to the aggressive debt-funded portfolio expansion. The deterioration came despite improved operating performance since 2009 and despite a rise in paid-up capital from the exercise of warrants held by SCIB in late 2009. 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, strengthened the ratio to 17.2% at the end of 2011 but dropped to 14.5% at the end of June 2012. The current level is considered adequate for THANI’s expansion plans for the next two years, under TRIS Rating’s scenario. THANI now has greater financial flexibility after becoming an affiliate of SCIB, which has since been merged into TBANK. At the end of December 2011, approximately 75% of THANI’s total borrowings were from TBANK. THANI refinanced most of its existing debts, both from TBANK and other financial institutions, with the debentures it issued in early 2012. After the refinancing, the ratio of total borrowings from TBANK fell to 18% of total borrowings as of June 2012. THANI has secured available funding sources from TBANK for its liquidity mitigation, said TRIS Rating. — End
Company Rating: Affirmed at BBB+ Issue Ratings: THANI144A: Bt2,000 million senior debentures due 2014 Affirmed at BBB+ THANI154A: Bt1,500 million senior debentures due 2015 Affirmed at BBB+ THANI164A: Bt3,000 million senior debentures due 2016 Affirmed at BBB+ Up to Bt3,000 million senior debentures due within 2016 BBB+ Rating Outlook: Stable
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