TRIS Rating has assigned the company rating of “A-” with “stable” outlook to Land and Houses Bank PLC (LH BANK), a wholly-owned subsidiary of LH Financial Group PLC (LHFG). The rating reflects LH BANK’s continual improvements in its business and financial profiles after upgrading its status to become a universal bank in 2011. The rating takes into consideration the wider diversification of LH BANK’s loan portfolio, good asset quality, high capitalization, and the financial support it receives from LHFG’s major shareholders. However, the rating is constrained by the bank’s relatively weak profitability, low franchise value resulting in small market shares in loans and deposits, smaller distribution network, and less diversified revenue sources. LH BANK also faces intensifying competition in the banking industry, as well as uncertainties in the worldwide economy. The “stable” outlook reflects the expectation that LH BANK will be able to expand continually its loan portfolio and generate stable earnings in the medium term. The outlook is also based on LH BANK’s ability to control asset quality after the rapid expansion of its corporate and SME loan portfolio, and its ability to secure stable sources of funding at reasonable prices.
LH BANK started operation as a retail bank in December 2005, and it could widen its scope of business after it was granted a universal banking license in December 2011. LH BANK maintains its role as a core subsidiary of LHFG, the financial holding company of Land and Houses Group. LHFG’s major shareholders comprised Land & Houses PLC (LH, rated “A” by TRIS Rating), Quality Houses PLC (QH, rated “A-”) and Ms. Piengjai Harnpanich, holding 34.39%, 21.60%, and 16.68%, respectively, as of April 2013. LH BANK is almost the smallest Thai commercial bank in terms of asset size. As of March 2013, LH BANK was ranked 14th among 15 Thai commercial banks, with 1.0% market share in loans and 0.9% share in deposits. As a new bank, the bank’s distribution network is relatively narrow, compared with large local banks. However, the bank has continually expanded the number of its micro branches to strengthen its banking channel for future growth. The bank’s operating platform and systems have been continuously developed and improved to enhance its efficiency.
LH BANK has grown rapidly after raising more capital and upgrading its status. In 2012, the bank’s loan portfolio expanded substantially, growing by 57% year-on year (y-o-y). Loans continued to rise through the first quarter of 2013. At the end of March 2013, loans and receivables reached Bt90.5 billion, up by 52% compared with Bt59.6 billion as of March 2012. Land and Houses Group includes several affiliated companies, such as two leading residential property developers and the leading home improvement retailer. These affiliations have helped LH BANK enlarge its business as well as its customer base. During 2006-2011, LH BANK expanded its loan portfolio through a strategic focus on mortgage financing services. However, under its new universal banking license, LH BANK has changed its strategic plan by focusing on more profitable lines of business. In addition, the bank’s loan portfolio has become more diversified. The bank has been shifting its loan portfolio mix by adding more high-yield corporate and small- and medium-sized enterprise (SME) loans to the portfolio. At the end of March 2013, LH BANK’s portfolio comprised corporate loans (41%), SME loans (22%), and retail loans (37%).
LH BANK’s asset quality remains strong. As of March 2013, the ratio of non-performing loans (NPLs) to total loans was 1.87%, below the industry average of 2.97% for the 11 Thai commercial banks (excluding four non-listed banks). In addition, LH BANK maintains a sufficient cushion of capital funds and allowances for doubtful accounts to absorb any unexpected deterioration in asset quality. At the end of March 2013, LH BANK’s non-performing assets (NPAs; the sum of classified loans more than three months overdue, plus restructured loans and foreclosed property) were 24% of its capital funds plus the allowance for doubtful accounts, well below the industry average of 39%. Nonetheless, LH BANK’s ability to control asset quality while rapidly expanding its loan portfolio amid an uncertain economy and intense competition, remains a challenge.
LH BANK’s financial performance has improved over the past five years. In 2012, LH BANK delivered a net profit of Bt681 million, rising by 36% y-o-y. For the first three months of 2013, net income was Bt205 million, up by 31% y-o-y. The bank’s improving performance was mainly driven by an increase in net interest income and non-interest income, together with efficient control of operating costs. LH BANK’s profitability, however, remains relatively low compared with its rivals. The bank’s interest spread was 1.65% in 2012, the lowest level in the industry. Return on average assets (ROAA) declined from 0.70% in 2011 to 0.67% in 2012, below the industry average of 1.41%. Non-annualized ROAA for the first quarter of 2013 was 0.16%, down slightly from 0.19% for the same period last year. Nonetheless, after adding more high-yield loans, LH BANK’s profitability is expected to improve gradually in the medium term.
LH BANK’s funding sources mainly comprise deposits (72%), borrowings from the interbank and money markets (17%), and shareholders’ equity (11%). The bank is exposed to some level of liquidity risk, as the bank has a negative maturity gap for assets and liabilities with less than 12 months duration. However, LH BANK is making an effort to increase the proportion of retail deposits to diversify and stabilize its funding base.
LH BANK’s capitalization is strong and sufficient to support its expansion efforts in the medium term. As of March 2013, LH BANK reported a common equity Tier 1 ratio of 15.72%, a Tier 1 ratio of 15.72%, and a total capital ratio (BIS ratio) of 16.34%. The bank’s ratios remain higher than the minimum requirements of 4.50%, 6.00%, and 8.50%, respectively, set by the Bank of Thailand (BOT).
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