TRIS Rating has affirmed the company rating of TISCO Financial Group PLC (TISCO) at “A-”. At the same time, TRIS Rating has revised TISCO’s outlook to “stable” from “positive”. The outlook revision reflects the company’s lower capital profile caused by steadily rising financial leverage, as TISCO’s loan portfolio has been growing strongly.
TISCO’s rating reflects its position as an investment holding company of TISCO Group, its control of TISCO Bank PLC (TISCOB) through a 99.98% ownership stake, and a stable stream of dividends from TISCOB. TISCO’s rating is one notch lower than the rating of its core bank subsidiary, TISCOB. The one notch difference reflects TISCO’s dependence on dividends from TISCOB and the regulatory barrier surrounding the payment of the dividends. The rating takes into consideration the capability and experience of TISCO’s management team, its ability to keep its strong market position in the auto hire-purchase segment, a sound risk management system, and well-diversified sources of income. These strengths, however, are partially offset by TISCO’s rising level of leverage as the asset base expands rapidly. The rating is also pressured by intense competition in the banking, hire-purchase, and securities industries, and the uncertainty in the economic environment. These factors might limit the Group’s expansion opportunities and future profitability.
The outlook revision to “stable” reflects TISCO’s weaker capital profile caused by higher financial leverage. The outlook also reflects the anticipation that TISCO will be able to retain its strong market position in auto hire-purchase lending, sustain the good quality of its loan credit profile, deliver the sound financial performance, and improve its capital base. TISCO’s rating and outlook are influenced by the credit ratings of its core subsidiary, TISCOB.
In 2008, TISCO and affiliated companies implemented a restructuring plan. TISCO was set up as a holding company and the parent company of the group of affiliated companies, in place of TISCOB. As of December 2012, TISCO’s largest shareholder was CDIB & Partners Investment Holding Pte Ltd., with a 10% stake, while the remaining shares belonged to local and foreign investors. In 2012, TISCO was ranked ninth among all 15 Thai commercial banks based on consolidated asset size, with a 2.7% market share in loans and a 2.3% share in deposits. On a consolidated basis, TISCO’s total assets were Bt290.5 billion in 2012, up by 32% year-on-year (y-o-y). At the end of 2012, TISCO’s loan portfolio grew by 34% y-o-y, climbing to Bt248.3 billion. TISCO’s loan portfolio comprises retail loans (71% of total loans), followed by corporate loans (17%), and commercial (small- and medium-sized enterprises, or SMEs) loans (10%). TISCO’s revenue base is relatively more diversified than its competitors, as illustrated by the ratio of fee-based income to total income. TISCO’s ratio is 22%, compared with the industry average of 17%. TISCO’s major revenue source is TISCOB, which contributes the largest portion (85%) of total interest income plus fee-based income. The remainder was contributed by TISCO Securities Co., Ltd. (TSC), TISCO Asset Management Co., Ltd. (TISCOASSET), and Hi-Way Co., Ltd.
TISCO’s management team has enabled the company to support the competitive positions of its subsidiaries. TISCO has established a good risk management framework, with a consolidated and centralized risk management system. As a consequence, TISCO can maintain the quality of its assets, as illustrated by ratio of non-performing loans (NPLs) to total loans. This ratio equaled 1.3% in 2012. The NPL to total loan ratio has been declining steadily, falling from 2.9% in 2008, and is the lowest in the banking industry. TISCO has maintained an adequate cushion of capital and allowances for doubtful accounts to absorb the risks from its non-performing assets (NPAs; classified loans more than three months overdue, plus restructured loans and foreclosed property). In 2012, NPAs as a percentage of total capital funds plus the allowance for doubtful accounts was 14%, below the industry average of 40%.
TISCO has delivered sound financial performance. Net income rose to Bt3.7 billion in 2012, up by 13% y-o-y, as fee-based income rose. TISCO also benefited from a decrease in the corporate income tax rate. However, return on average assets (ROAA) has continually declined, falling to 1.5% in 2012, from 1.7% in 2011 and 1.9% in 2010. Despite the fall, this ratio remained above the 2012 industry average of 1.3%. TISCO’s profitability has reduced during the past few years. Its interest spread fell to 2.43% in 2012, from 3.21% in 2011, and 4.28% in 2010. Funding costs have continuously increased as market interest rate rose, reflecting higher competition for funds among lenders. Nonetheless, TISCO’s efficient operating cost controls help mitigate some of the negative effects from the increasing cost of funds. TRIS Rating also expects that TISCO will be able to control its funding costs in the medium term.
In terms of capital funds, TISCO has a higher degree of financial leverage than its peers. Its equity to asset ratio fell continuously from 9.14% in 2008 to 6.33% in 2012. This ratio declined because TISCO expanded its loan portfolio rapidly, and paid generous amounts of dividend to its shareholders. TISCO plans to increase its capital funds through a Transferable Subscription Rights (TSR) program, which will be effective by the end of the second quarter of 2013. However, TISCO’s capital profile will not improve substantially, given the amount of dividends it intends to pay in 2013. In 2012, on a fully consolidated basis, TISCO implemented the Basel II Internal Rating Based (IRB) approach, in place of Standardized Approach (SA). The IRB approach is used to calculate the amount of regulatory capital needed by the Group, based on credit risk. This approach can help TISCO improve the efficiency of its risk management and capital management activities. TISCO has a sufficient capital base to fund its loan growth plans in the medium term. As of December 2012, TISCO reported a Tier-1 ratio and a total capital ratio (BIS ratio) of 8.60% and 12.56%, respectively, above the minimum requirements of 4.25% and 8.50% set by the Bank of Thailand (BOT).
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