TRIS Rating Co., Ltd. has affirmed the company rating of Secondary Mortgage Corporation (SMC) at “A+” with “stable” outlook. The rating is enhanced from SMC’s stand-alone rating to reflect the strong support SMC receives from the government. SMC is a special financial institution (SFI) and is 100% owned by the Ministry of Finance (MOF), with a mission to promote the Thai secondary mortgage market. SMC has a competitive advantage from the special legal and regulatory support it receives, plus the tax privileges granted to SMC under the Emergency Decree on Secondary Mortgage Finance Corporation B.E. 2540. The composition of SMC’s board has been carefully chosen to support its mission. However, the stand-alone rating is constrained for several reasons: SMC’s short track record in performing its mission due to the unfavorable market conditions for secondary mortgages, deteriorating asset quality, and less competitive funding costs compared with commercial banks and other SFIs. The “stable” outlook reflects the medium-term expectation that the SMC’s management team will be able to improve operating efficiency continuously and acquire a sizable portfolio from the alliances as planned. The outlook also reflects the expectation that SMC’s relations with the government and related state entities, along with the business and financial support it receives from the government, remain unchanged in the future. Also, it is expected that SMC will get both direct and indirect support from the government to amend related laws, and stimulate demand for MBS.
TRIS Rating reported that SMC was incorporated in 1997, under the Emergency Decree on Secondary Mortgage Finance Corporation B.E. 2540, with initial capital of Bt1,000 million. Under the Act, the government can guarantee the debt issued by SMC for not more than four times the amount of SMC’s capital. In January 2009, the MOF injected Bt100 million of new capital into SMC. SMC’s board of directors is composed of the representatives from both the private sector and various governmental entities, including the Fiscal Policy Office, Bank of Thailand (BOT), Securities and Exchange Commission (SEC), Government Housing Bank (GHB), and Land Department, together with no more than four qualified directors plus SMC’s managing director (MD).
TRIS Rating said, SMC was established to create a secondary mortgage market and make long-term fixed rate mortgage loans available to home owners. About 80% of SMC existing portfolios are mortgage loans acquired from financial institutions which provide mortgage financing services in the primary markets, then pools mortgage loans to issue mortgage-backed securities, and sell the securities to investors. However, SMC’s growth prospects have remained limited since commercial banks have not faced liquidity shortages, have strong capital bases, and prefer to retain mortgage loans in their portfolios. Mortgage loans generate high margins and have low risk weighting compared with other types of consumer loans and commercial loans.
During 2007 and 2008, SMC revamped its business processes, reorganized its management systems, and developed its internal control systems. By the end of 2007, SMC appointed a new MD and some key managers. Since 2009, SMC has been developing its information technology capabilities, along with its risk management and internal control systems, in order to enhance its long-term operating efficiency. According to SMC’s business plan, staff competency is another crucial element needed to enhance the quality of SMC’s loan servicing and loan monitoring capabilities. In May 2012, SMC promoted the deputy MD to be the new MD. TRIS Rating expects SMC to continue to operate smoothly, because it has continuity among the key managers.
During 2009 and 2010, SMC allied with three financial institutions to offer long-term fixed rate mortgage loans. This new business channel originated new loans worth Bt152 million as of December 2010. By December 2011, this new channel generated Bt392 million in new loans. SMC also planned to have some cooperative efforts with GHB. The plans called for a sizable portion of GHB’s housing loan portfolio to be transferred to SMC. This cooperation was not executed as planned in 2010. As a result of the reduced flow of new loans, the value of SMC’s loan portfolio declined from Bt1,768 million in 2008 to Bt1,626 million in 2009, and Bt1,543 million in 2010. The portfolio increased to Bt1,732 million in 2011 because the allied financial institutions sold more loans to SMC. SMC’s portfolio declined slightly to Bt1,632 million at the end of June 2012.
Due to a rise in non-performing loans or NPLs, SMC posted a loss of Bt329 million in 2007, following annual losses of Bt99 million in 2006 and Bt120 million in 2005. SMC wrote off Bt318 million in bad loans in 2007, which pushed the ratio of NPLs to total loans down from 39.79% in 2006 to 6.90% in 2007. The ratio increased to 8.94% in 2008, then jumped to 18.84% in 2011 and to 17.86% as of June 2012. This level was far higher than the average NPL level of 3.56% for all 15 universal banks in 2011, and an average of 4.47% for the seven SFIs in 2011. Of SMC’s NPLs, 86% were loans acquired before 2006, while 14% of the bad loans were acquired in 2009-2011. However, TRIS Rating is concerned about the quality of loans acquired in 2009-2011, when SMC’s loan portfolio increased substantially.
In 2008, SMC reported a Bt22 million net profit after three consecutive yearly losses. SMC then reported Bt26 million in net profit in 2009. In 2010, net profit was only Bt0.3 million, due to a decline in operating income and an increase in the allowance for bad debts and doubtful accounts. The increase in the allowance was required in order to bring SMC into compliance with International Accounting Standard 39 (IAS39). In 2011, net profit recovered to Bt4.1 million, as the loan portfolio grew and the expenses for bad debt and doubtful accounts fell to only Bt5 million. For the first half of 2012, net profit was only Bt1.2 million as the interest spread narrowed. A majority of SMC’s funding base is short-term promissory notes. Short-term promissory notes comprised 77% of SMC’s total funding as of June 2012. SMC’s cost of funds was 3.77% (annualized) in the first half of 2012, compared with 3.64% in 2011. SMC’s funding costs are higher than the funding costs of commercial banks which provide mortgage financing services in the primary markets. This put SMC in a competitive disadvantage.
In the third quarter of 2012, SMC bought about Bt880 million of Kiatnakin Bank PLC’s (KK) existing housing loans, pushing SMC’s loan portfolio to Bt2,575 million as of September 2012. SMC plans to match its loan portfolio by issuing mortgage-backed securities (MBS) before the end of December 2012. A success issuance of MBS will benefit SMC in three ways. The issuance will help SMC fulfill its mission to develop the secondary mortgage market. The issuance will also increase the number and type of alternative securities, such as MBS, available to investors. Lastly, the issuance will reduce the current mismatch in the structure of SMC’s assets and liabilities, said TRIS Rating. — End
Company Rating: Affirmed at A+ Rating Outlook: Stable
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