TRIS Rating has affirmed the company rating of TISCO Bank PLC (TISCOB), a 99.98% owned subsidiary of TISCO Financial Group PLC (TISCO), at “A”, and has also affirmed the rating of TISCOB’s subordinated debentures at “A-”. TRIS Rating has also revised TISCOB’s outlook to “stable” from “positive”. The outlook revision reflects the recent deterioration in TISCOB’s capital cushion caused by steadily rising financial leverage.
TISCOB’s ratings reflect its capable management team, plus the bank’s ability to maintain its strong competitive position in automobile hire-purchase lending and its ability to achieve a sustainable level of profits. The ratings also take into account the bank’s good risk management platform and good quality of its assets. However, the ratings are constrained by the bank’s small market shares in loans and deposits, its limited distribution network, increasing funding costs, and a rising level of financial leverage. In addition, TISCOB faces intense competition in the banking industry, as well as uncertainties in the economic and financial environments. These forces might pressure the bank’s long-term competitiveness, its profitability, and the stability of its capital base.
The outlook revision to “stable” from “positive” reflects TISCOB’s lower capital profile caused by continually higher financial leverage. The outlook also reflects the expectation that TISCOB will be able to retain its strong competitive position in auto hire-purchase lending, to sustain the good quality of its loan credit profile, and to deliver sound financial performance. TISCOB’s ratings and outlook will be influenced by the way in which it meets the challenges of improving its capital base, and securing stable sources of funding at reasonable prices.
TISCO Group was ranked ninth among 15 Thai commercial banks in terms of asset size in 2012, with a 2.7% market share in loans and a 2.3% share in deposits. TISCOB has continually expanded its loan portfolio, at a compound annual growth rate of 24% over the past five years. As of December 2012, TISCOB’s loan portfolio totaled Bt238.7 billion, jumping by 33% year-on-year (y-o-y). TISCOB’s management team has enabled the bank to grow in niche markets. TISCOB has maintained its market position in its core business, auto hire-purchase lending. In 2012, TISCOB was the third-largest among 17 auto loan providers in Thailand, with approximately 12% market share. TISCOB’s hire-purchase loans reached Bt154.6 billion in 2012, thanks to the y-o-y growth of 29%. The bank’s hire-purchase loans grew rapidly, following a remarkable increase in domestic auto sales. In addition, TISCOB has expanded in the corporate loan and commercial (small- and medium-sized enterprises, or SMEs) loan segments. Corporate loans and commercial loans have grown substantially, particularly loans made to the manufacturing and commerce segment, as well as the public utilities and service segment. Despite more diversification across a wider range of industry segments, TISCOB still faces loan concentration risk due to its large-sized borrowers. The bank’s cushion of capital funds may deteriorate, should large sized loans become troubled loans.
TISCOB’s asset quality remains healthy, as the bank has an effective risk management system in place to control its asset quality. During 2008-2011, non-performing loans (NPLs) have continuously decreased, from Bt2.6 billion in 2008 to Bt2.2 billion in 2011. However, NPLs rose to Bt2.8 billion in 2012, a 25% y-o-y jump, following the bank’s strong loan expansion. The rise was due in part to the effect of the heavy floods in Thailand in late 2011. The ratio of NPLs to total loans, however, has fallen steadily, dropping from 2.5% in 2008 to 1.2% at the end of 2012. The bank’s NPL ratio remains the lowest in the commercial banking industry. TISCOB has maintained a sufficient level of reserves for loan losses, with reserves equaling 169% of NPLs in 2012.
TISCOB’s financial position remains satisfactory. In 2012, net income increased by 5% y-o-y to Bt2.8 billion, up from Bt2.6 billion in 2011. Fee-based income rose significantly in 2012, leaping by 55% y-o-y, while interest income increased by only 1% y-o-y. TISCOB’s profitability has been pressured by the greater competition in banking industry. The bank’s interest spread continued to decline, sagging from 4.08% in 2010, to 3.02% in 2011, and to 2.26% in 2012. The interest spread squeeze was mainly the result of a rise in funding costs amidst an intense competition in deposit market. In addition, the bank’s credit cost increased, soaring by 47% y-o-y in 2012. Despite efficient control of its operating costs, TISCOB’s pre-tax income fell by 7% y-o-y, from Bt3.8 billion in 2011 to Bt3.5 billion in 2012. Return on average assets (ROAA) and return on average equity (ROAE) in 2012 were 1.13% and 19.01%, respectively, down from 1.41% and 20.22% in 2011. TISCOB has a larger appetite for risk. As a result, TISCOB may take on more higher-risk loans so as to achieve a sustainable level of profits. Furthermore, TRIS Rating expects that TISCOB will be able to control its funding costs in the medium term.
In terms of funding and liquidity, TISCOB is exposed to some level of liquidity risk. TISCOB has relied more on wholesale funding, which tends to be a more volatile funding source than retail deposits. The majority of TISCOB’s funds comprises funds from large depositors and lenders (deposits or bills of exchange valued at more than Bt10 million). In 2012, funds from large depositors and lenders accounted for 84% of TISCOB’s funding base, up from 73% in 2011. The bank’s liquidity may weaken, should a large number of depositors or lenders wish to withdraw their funds at once.
TISCOB has a high level of financial leverage. The ratio of equity to assets declined from 9.3% in 2008 to 5.5% in 2012, the lowest in the industry. The high leverage was caused by the aggressive loan expansion, as well as sizeable dividend payouts. TISCOB plans to increase its capital funds through TISCO’s Transferable Subscription Rights (TSR) program, which will be effective by the end of the second quarter of 2013. However, TRIS Rating expects the bank’s capital profile, after this capital funds increase, will not improve significantly. As a consequence, TISCOB’s capital cushion may be further reduced, given its rapid loan growth in the medium term. TISCOB has utilized the Basel II Internal Rating Based (IRB) approach to calculate the regulatory-mandated amount of capital needed based on credit risk. This process helps the bank improve the efficiency of its risk management and capital management activities. The bank’s regulatory capital base remains adequate for its expansion efforts in the medium term. As of December 2012, TISCOB reported a Tier-1 ratio and a total capital ratio (BIS ratio) of 8.51% and 12.79%, respectively, down from 9.88% and 14.91% in 2011. Though lower, these ratios remain above the minimum requirements of 4.25% and 8.50%, set by the Bank of Thailand (BOT).
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