TRIS Rating has affirmed the company rating of Police General Hospital Saving and Credit Cooperative Ltd. (PHSC) at “BBB+”. The outlook remains “stable”. The rating reflects the status of PHSC as a captive financial service provider for PHSC’s members who work at the Police General Hospital (PGH) and related entities. The rating is also supported by the strong credit profile of PGH as a government entity, the good quality of outstanding loans, and the capability of PHSC’s management team to deliver satisfactory financial performance, which enables it to pay the maximum dividend allowed by law to its ordinary members. The legal privileges extended to savings cooperatives also secure loan quality and enhance the competitive edge of PHSC over traditional financial institutions. However, PHSC’s credit strengths are partially offset by its short track record of maintaining and managing a sizable base of assets, an aggressive funding policy which relies heavily on deposits from affiliate members, the risk of overdependence on one key member of the management team, and relatively weak capitalization. The “stable” outlook reflects the expectation that PHSC will be able to maintain its deposit base and deliver performance which will enable satisfactory returns to be paid to its ordinary members. A change in the key member of the management team to a less capable member than the existing one, or any changes which make important operating policies more aggressive, or any regulatory changes that reduce privileges for savings cooperatives might impact the rating. However, TRIS Rating expects that all negative factors will not occur in the short to medium term.
PHSC was set up in 2002 as a savings cooperative for PGH’s personnel. PHSC provides limited financial services for its members mainly including deposit taking and loan providing. As with other savings cooperatives, PHSC also provides welfare benefits, such as an allowance for illness and money supports for funerals and scholarships. PHSC has been expanding and adding other benefits for its members, as other long-established savings cooperatives do, to encourage its ordinary members to maintain their memberships. Savings cooperatives have some advantages over traditional financial institutions due to special legal privileges. PHSC and its members are exempt from all major taxes such as corporate income tax, personal income tax on interest earned on savings deposits, and tax on dividends paid by the cooperative. The high credit quality of loans granted to PSHC’s ordinary members, as is the traditional practice of savings cooperatives, is due to PHSC’s practice of providing loans to ordinary members through agreements with their employers. Loan repayments can be deducted from ordinary member’s monthly payroll. According to cooperative laws, PHSC has the first priority claim over any other creditors, except for any legal obligation to pay under a specific law. This legal support reduces the credit risk of PHSC’s loans to its members and sustains the cash inflows from loan repayments made to the cooperative. In addition, the strong credit profile of PGH, together with the job security of its members as employees of a government entity, has ensured the stability of the number of ordinary members. This stability continuously increases PHSC’s capital base through the monthly obligation of ordinary members to purchase PHSC’s shares.
In 2012, PHSC was ranked 93th among 1,326 savings cooperatives in Thailand, up from the 103rd among 1,297 savings cooperatives in 2011. PHSC’s total assets grew continuously from FY2011 (ending September 2011), rising to Bt4,666 million in FY2012 and Bt5,777 million at the end of March 2013. PHSC is classified as a relatively large savings cooperative among the approximately 1,300 savings cooperatives. However, PHSC’s current asset size is quite small when compared with one long-established largest savings cooperative which has total assets of more than Bt60,000 million. The aggressive increase in PHSC’s total assets during the past three years was a consequence of contributions by affiliate members.
The employees of the PGH and its related entities are the only people who are qualified to be ordinary members of PHSC. This type of membership criterion is a normal requirement of traditional savings cooperatives. PHSC also has affiliate members, as do other savings cooperatives. However, the qualifications for being an affiliate member of PHSC are not as stringent as at other savings cooperatives. Membership is open to anyone who helps or gives benefits to PHSC. Therefore, by offering all members attractive interest rates and tax-exempt interest income, PHSC has been able to raise a substantial amount of funds through savings deposits made by affiliate members. At the end of March 2013, PHSC had Bt4,547 million in deposits; 91% were deposits from members and 9% were from other cooperatives From the total of Bt4,132 million in members’ deposits, 79% were from affiliate members and 21% were from ordinary members. PHSC’s liquidity risk depends on the roll-over rate of the deposit base, especially from affiliate members who have no relationship with either PHSC or PGH and have no other benefits besides attractive interest rates on deposits. Thus, PHSC remained exposed to liquidity risk to a certain extent. PHSC has mitigated this risk by maintaining an adequate portion of liquid assets and unused credit facilities with traditional financial institutions. TRIS Rating expects that as long as PHSC is able to gain tax privileges to offer attractive interest rates, coupled with a conservative investment policy to maintain a relatively high portion of liquid assets, the level of liquidity risk is acceptable.
PHSC has expanded the amount of loans made to other savings cooperatives since FY2010. These loans are expected to yield returns higher than the returns from the investment portfolio. As of late, demand for loans from members has remained quite small, due to the profiles of its ordinary members. The loan portfolio maintained at 45% of total assets at the end of FY2012 and increased to 51% at the end of March 2013. At the end of March 2013, Bt2,650 million or 87% of the loan portfolio was loans made to other savings cooperatives while the remainder was loans made to ordinary members. PHSC has been able to release its loan concentration risk on loans made to other cooperatives by expanding its borrower base. The top-three savings cooperatives have taken 23% of total loans made to other savings cooperatives at the end of March 2013. The proportion reduced substantially from above 40% at the end of FY2011. PHSC has had no non-performing loans (NPLs) (overdue more than 90 days) since FY2007, whether counting loans made to other savings cooperatives or loans made to ordinary members.
The portion of loans has risen substantially since FY2010. However, the ratio of loans to adjusted deposits remained low at 46.1% in FY2012. PHSC delivered outstanding performance in terms of net income. Net profit increased from Bt13.4 million in FY2008 to Bt32.7 million in FY2009 and Bt60.1 million in FY2010. The improvement was mainly due to the gains from the investment portfolio during those two years. Net profit dropped to Bt31.8 million in FY2011 because PHSC emphasized its traditional activities of deposit taking and loan providing while maintaining its investment portfolio in liquid assets and receiving interest in return. Although the performance dropped in FY2011, it was considered high in terms of return on average equity (ROAE), mainly due to the low capital base. Net profit improved again to Bt58.7 million in FY2012 and Bt42.1 million for the first half of FY2013. Due to the outstanding performance and low capital base, PHSC was able to pay dividends to shareholders at the maximum level allowed by law at 10% of paid-up shares. The capital base will automatically increase through the mechanism of monthly share purchased by members. If PHSC aggressively expands the asset base through the leveraging off of deposits, the capitalization ratio will unavoidably deteriorate. PHSC’s financial position and performance are highly dependent on a key member of the management team. PHSC’s policy and direction has mostly originated from this key person. PHSC is trying to implement standard operating policies and procedures, as well as obtain various support tools to cover all of its main business activities. This will help mitigate the risk of an over-reliance on one person.
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