TRIS Rating has affirmed the company and existing senior debenture ratings of Ratchthani Leasing PLC (THANI) at “BBB+”. At the same time, TRIS Rating has assigned a “BBB+” rating to THANI’s proposed issue of up to Bt3,000 million in senior debentures. The outlook remains “stable”. The proceeds from the new debenture issuance will be used to refinance THANI’s outstanding debts and expand its loan portfolio. The ratings reflect the extensive experience of the management team in the used car financing business, plus the continuous improvements in the company’s operating processes and risk management systems. The ratings also reflect THANI’s improved financial performance and stronger market position, because it receives business and financial support from its major shareholder, Thanachart Bank PLC (TBANK). The ratings of THANI are enhanced from its stand-alone rating because the company is currently classified as a subsidiary of TBANK, under the consolidated supervision regulations issued by the Bank of Thailand (BOT). However, the ratings are mitigated by concerns over intense competition and the quality of THANI’s loan portfolio, now that THANI has decided to focus on making loans for commercial trucks. This type of loan is more sensitive to adverse changes in the economy. The “stable” outlook reflects the expectation that THANI’s experienced management team, improving operating efficiency, and support from its parent company will enable THANI to expand its loan portfolio in the market segments it has targeted. Loan quality is expected to be controlled and maintained at an acceptable level. In addition, support from its parent company is expected to continue, especially the provision of credit facilities.
THANI has been a subsidiary of TBANK since 2010, after Siam City Bank PLC (SCIB) and TBANK merged and undertook a recapitalization. TBANK now includes THANI as one of its subsidiaries on a non-solo consolidation basis, consistent with the BOT’s consolidated supervision regulations. Although THANI’s main line of business overlaps with TBANK’s auto loan business, the two companies have targeted different product and market segments. TBANK intends to have THANI focus on market segments which TBANK has not yet penetrated. TBANK has helped THANI develop its underwriting and collection processes to improve operational efficiency. THANI has implemented a number of risk management policies to comply with the standards required by TBANK. Lastly, THANI has changed its information technology system for hire purchase lending so that it uses TBANK’s system. THANI began to use TBANK’s accounting system in April 2013. THANI has been closely supervised by its parent bank and indirectly supervised by the BOT through the parent bank.
THANI’s market position has improved, after THANI became an affiliate of SCIB in 2006. The company could leverage its stronger capital base and use funding from its parent bank to finance an expansion of its loan portfolio. Outstanding loans have risen substantially since 2006, climbing at an average annual growth rate of 48% during 2007-2011. The total loan portfolio increased from Bt1,775 million in 2006 to Bt12,483 million in 2011. THANI has more financial flexibility after becoming TBANK’s subsidiary. THANI can receive a greater level of business and financial supports from its parent bank. The support it receives has enhanced THANI’s competiveness and boosted its efforts to expand. THANI has been able to continuously improve its market position, as shown by the continued growth in its loan portfolio. The value of the portfolio doubled to Bt24,093 million at the end of June 2013, compared with the size of the portfolio in 2011.
THANI has been focusing its efforts on the commercial truck segment since 2006. Loans made to this segment constituted 72% of the company’s total hire purchase loan portfolio at the end of June 2013. THANI compensates for the increased risk in this new customer segment by charging higher interest rates, requiring high down payments, and calling for post-dated payment cheques. As commercial truck loans are considered sensitive to adverse changes in economic conditions, THANI faces two challenges during the current economic slowdown: maintain its business and control its loan quality at an acceptable level.
THANI’s ratio of non-performing loans (NPLs) to total loans has fallen almost every year since 2008 onward. The ratio dropped from 4.9% in 2008 to 2.3% as of June 2013, despite a slight rise of 3.7% at the end of 2011. The rise in 2011 was triggered by the widespread flooding in the last quarter of that year. The improvement in the loan quality ratio was partly due to the significant expansion of the loan portfolio.
THANI reported a net profit of Bt204 million in 2010, almost double the profit of Bt109 million recorded in 2009. Net profit stayed steady at Bt205 million in 2011 due to a post-flood rise in loan loss provisions. Loan loss provisions rose to Bt126 million in 2011, from Bt40 million in 2010, mainly to serve as a cushion against higher NPLs. Profitability improved significantly in 2012. Net profit increased 139% to Bt489 million, when compared with net profit in 2011. The improvement in profitability was due to an aggressive portfolio expansion, plus economies of scale in operating costs, and a lower cost of funds. Operating efficiency improved as the loan portfolio grew, due to economies of scale and support from TBANK. The ratio of operating expenses to total income halved to 13.3% in 2012 from 26.7% in 2009. The ratio has continued to decrease, sliding to 9.9% at the end of June 2013. Intensifying competition has constrained interest yields. However, THANI now has a lower-cost source of funds because it can secure funding from its parent bank. THANI can also secure lower-cost source of funds from the capital market, through the issuance of debentures and bills of exchange (B/E). The lower-cost sources of funds have helped THANI improve its interest spread to approximately 4.5% (annualized) for the first half of 2013, compared with 3.6% in 2012 and 3.0% in 2011. The return on average assets (ROAA) was 3.7% (annualized) for the first half of 2013, improving from 3.1% in 2012 and 1.9% in 2011.
THANI’s capital base has deteriorated due to the aggressive debt-funded portfolio expansion. The deterioration came despite improved operating performance since 2009 and a rise in paid-up from two recent recapitalizations. The ratio of shareholders’ equity to total assets sagged from 31.4% in 2007 to 13.4% in 2010 and 12.2% at the end of September 2011. The recapitalization in November 2011 strengthened the ratio to 17.2% at the end of 2011. THANI used more debt financing to fund the significant growth of its loan portfolio in 2012. As a result, the ratio of shareholders’ equity to total assets dropped to 13.0% at the end of 2012. Although THANI paid a stock dividend in an effort to increase its equity capital base in 2013, the ratio of shareholders’ equity to total assets still fell. The ratio dropped to 11.9% at the end of June 2013 due to aggressive growth in the loan portfolio during the same period.
THANI now has greater financial flexibility after becoming an affiliate of SCIB, which has since been merged into TBANK. At the end of December 2011, approximately 75% of THANI’s total borrowings were from TBANK. THANI refinanced most of its existing debts, both from TBANK and other financial institutions, with the debentures it issued in 2012. At the end of June 2013, THANI had no borrowings from TBANK. THANI has secured funding sources from TBANK to meet its liquidity needs.
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