TRIS Rating has affirmed the company rating of Thanaban Co., Ltd. (TNB) at “BBB” with “stable” outlook. The rating reflects TNB’s track record of impressive financial performance, the capability and experience of the management team in the motorcycle financing segment, as well as TNB’s adequate capitalization. The rating also takes into consideration the on-going development of and improvements in its operating processes and risk management systems. The processes and systems are being improved to meet the banking standards of its parent bank, The Thai Credit Retail Bank PLC (TCRB). However, intense competition in the motorcycle financing segment, plus the high credit risk profiles of its target customers, mitigate the strengths underlying the rating. The “stable” outlook is based on TRIS Rating’s expectation that TNB will be able to maintain its market position and improve its performance in 2013. Loan quality is expected to be controlled at an acceptable level. In addition, TNB’s conservative business policies, along with financial support from its parent bank, are expected to continue.
TNB was established in late 1978 through the cooperation of three entrepreneurial families. In terms of outstanding loans, the company is the seventh-largest firm among 11 major competitors in TRIS Rating’s database. The company’s operations are concentrated in the Greater Bangkok area. During the past few years, TNB’s has been expanding to provincial areas. Before TNB was acquired by TCRB in 2009, the amount of outstanding loans ranged from Bt500 million to Bt700 million, depending on the level of competition in each year. TNB’s loan portfolio rose substantially by 39.2% in 2012, climbing to Bt1,370 million. Despite this rapid increase in the size of the loan portfolio, TNB’s market position is considered weak when compared with the major firms in the industry. However, TNB has an impressive track record of success, which helps stabilize its loan portfolio while turning in notable financial results. This track record proves that TNB’s business profile is acceptable, even though motorcycle financing is a high risk business.
The strong foundation of TNB’s business has helped the company survive as new entrants intensified competition during 2005-2006. TNB’s conservative business policy, enacted by the founding shareholders, has made the high risk, high return motorcycle financing business a success. After a significant change in its shareholding structure in late 2009, TNB has improved its operating processes, strengthened its underwriting criteria and collection system, and enhanced its risk management systems and policies.
TNB’s outstanding loans increased from Bt592 million in 2009, to Bt666 million in 2010, Bt984 million in 2011, and then rose substantially to Bt1,370 million in 2012. As is the nature of the vehicle financing business, most new accounts are originated through dealers. Although the company has almost 100 dealers in its marketing network, almost 70% of new accounts are typically originated through its top 10 dealers. This means the company is exposed to business concentration risk in terms of the dealers. However, TNB has strong, established relationships with its dealers, dating back more than 20 years. The long history helps TNB mitigate the business concentration risk. In addition, the company has been providing good and quick service to its dealers while maintaining its conservative underwriting criteria. At present, TNB is trying to diversify its dealer base by expanding its market coverage area and increasing the number of active dealers.
TNB’s loan quality has improved since it was acquired by TCRB. The ratio of non-performing loans (NPLs; loans more than three months overdue) to total loans improved and fell from 10.5% in 2008 to 1.6% in 2011. However, the NPL ratio rose significantly to 3.2% at the end of September 2012 before improving to 2.7% at the end of 2012. TRIS Rating expects the company will be able to control its loan quality after the company strengthened its underwriting criteria and sped up the collection process.
In 2010 and 2011, TNB’s performance was burdened by the extra expenses it incurred after signing an advisory agreement. The agreement was signed to ensure a smooth transition from the founding shareholders to TCRB. Net profit was Bt40 million in 2010 and improved to Bt53 million in 2011. The performance in 2012 was expected to improve because there were no extra operating expenses in 2012, unlike in 2010 and 2011. However, in 2012, TNB’s performance was affected by severe flooding in Greater Bangkok area, resulting in a rise in NPLs and greater losses from the sale of repossessed motorcycles. Net profit dropped substantially in 2012, falling to Bt22 million. The ratio of return on average assets (ROAA) dropped to 1.8%, which was substantially lower than those of industry peers. TNB’s efforts to improve the quality of its loan portfolio are expected to reduce the number of repossessed motorcycles it will sell. Losses from the sale of repossessed motorcycles are expected to be lower, in contrast to the high losses TNB incurred in 2012. If TNB cannot improve its performance in 2013, the credit profile will deteriorate and will then affect its credit rating.
TNB’s financial flexibility has been enhanced after it became a subsidiary of TCRB. TNB now comes under the “solo consolidation” category of the consolidated supervision regulations issued by the Bank of Thailand (BOT). Being in the “solo consolidation” category improves TNB’s financial flexibility because it can receive financial support from its parent bank. The ratio of shareholders’ equity to total assets dropped substantially from 56.7% in 2011 to 39.9% in 2012. The ratio fell because the loan portfolio growth was funded with new borrowing and because TNB had a high dividend payout ratio. Although the current equity base is considered adequate for the company to expand its loan portfolio as planned, TRIS Rating expects the company to maintain a larger capital base than other traditional vehicle financing companies. The larger capital base will serve as a cushion to absorb the risk from customers with higher credit risk. This type of customer is more vulnerable to adverse changes in the economy.
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