TRIS Rating has assigned an “A” rating to the proposed issue of up to Bt20,000 million in senior debentures of TISCO Bank PLC (TISCOB), a 99.98% owned subsidiary of TISCO Financial Group PLC (TISCO). At the same time, TRIS Rating has affirmed the company rating of TISCOB at “A” and has also affirmed the rating of TISCOB’s subordinated debentures at “A-”. The outlook remains “stable”. 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, high 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 “stable” outlook 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.
The 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. The loan portfolio grew at a compound annual growth rate of 24% over the past five years. As of March 2013, TISCOB’s loans and receivables reached Bt255.8 billion, up 7% from the December 2012 level. The experience of TISCOB’s management team has enabled the bank to grow in niche markets. The bank has maintained its market position in its core business, auto hire-purchase lending. TISCOB was the third-largest of 17 auto loan providers in Thailand, with approximately 12% market share in 2012. The bank’s hire-purchase loan portfolio grew rapidly in 2012 through the first quarter of 2013. At the end of March 2013, the total amount of outstanding hire-purchase loans reached Bt172.4 billion. In addition, TISCOB has expanded in the corporate loan and small- and medium-sized enterprises (SME) loan segments. Corporate loans and SME loans have grown substantially, particularly loans made to the manufacturing and commerce segment, as well as the public utilities and service segment. Despite greater diversification across a wider range of industry segments, TISCOB still faces loan concentration risk due to its large-sized borrowers. The bank’s capital buffer may deteriorate should any large-sized loan become a troubled loan.
TISCOB’s asset quality remains healthy, as the bank has an effective risk management system in place to control its asset quality. Non-performing loans (NPLs) have continuously decreased, falling from Bt2.6 billion in 2008 to Bt2.2 billion in 2011. However, TISCOB has had an increasing appetite for risk recently. TISCOB has taken on more higher-risk loans so as to achieve a sustainable level of profits. As a consequence, NPLs rebounded to Bt2.8 billion in 2012 and to Bt3.0 billion as of March 2013. Nonetheless, the ratio of NPLs to total loans has fallen steadily due to the bank’s aggressive extension of new loans. As of March 2013, the NPL ratio was 1.2% of total loans, the lowest in the commercial banking industry.
TISCOB’s financial position remains satisfactory. In 2012, net income was Bt2.8 billion, up by 5% year-on-year (y-o-y). Fee-based income rose significantly, leaping by 55% y-o-y, while interest income increased by only 1% y-o-y. TISCOB’s profitability has been under pressure due to greater competition in the banking industry. During the past few years, the bank’s interest spread has declined as the result of a rise in funding costs amidst intense competition for deposits. After the recent cut of the policy interest rate, the bank’s funding costs are anticipated to be lower. For the first quarter of 2013, TISCOB’s net interest income and fee-based income continued to rise, while its operating costs were still being controlled efficiently. However, the bank set up a substantial provision for loan losses and added the provision to its surplus reserves. As a result, net profit for the first three months of 2013 was Bt641 million, up only by 1% y-o-y. In 2012, return on average assets (ROAA) and return on average equity (ROAE) were 1.13% and 19.01%, respectively, down from the levels reached in 2011. For the first quarter of 2013, the non-annualized ROAA and ROAE were 0.22% and 4.13%, respectively, down from 0.29% and 4.50% for the same period of the prior year.
In terms of funding and liquidity, TISCOB is exposed to some level of liquidity risk. TISCOB has relied on wholesale funding, which tends to be a more volatile funding source than retail deposits. The majority of TISCOB’s funding base comprises funds from large depositors and lenders (deposits or bills of exchange (B/Es) 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 5.3% as of March 2013, 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. TISCOB has utilized the Basel III Internal Rating Based (IRB) approach to calculate the regulatory-mandated amount of capital for credit risk. This approach 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 March 2013, TISCOB reported a Tier-1 ratio and a total capital ratio (BIS ratio) of 8.33% and 12.92%, respectively. These ratios remain above the minimum requirements of 6.00% and 8.50% set by the Bank of Thailand.
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