TRIS Rating has affirmed the company rating of Thanachart Bank PLC (TBANK) at “AA-”, and has affirmed the ratings of TBANK’s subordinated debentures and hybrid debt capital securities at “A+” and “A”, respectively. The outlook remains “stable”. The ratings reflect TBANK’s strong market position in its core line of business, hire purchase lending. The ratings also take into account the fact that TBANK now has an improved risk management system. In addition, the ratings are enhanced by the strong credit profile of its Canadian strategic partner, Bank of Nova Scotia (BNS), which holds a 49% stake in TBANK through Scotia Netherlands Holdings BV. These strengths, however, are constrained by TBANK’s weak asset quality with a high level of non-performing assets (NPAs), a relatively low but improved cushion of reserves for loan losses, and intensifying competition in the banking industry.
The “A” ratings for TBANK’s hybrid debt capital securities (TBANK197A and TBANK247A) reflect both the subordination risk and the payment deferral risk of the issues. The hybrid debt capital securities are cumulative, junior subordinated, unsecured, and due in 2019 and 2024. The securities are also callable by the bank any time before the maturity dates, as long as the call date is at least five years after issuance and as long as the bank has received approval from the BOT. The holders of the hybrid debt capital securities will be subordinated to depositors and holders of the bank’s senior debt and subordinated debt securities. The bank will not be obliged to make an interest payment on the hybrid debt capital securities if two conditions are met: if the bank posts a net loss for the six-month period preceding an interest payment due date, and if the bank is unable to pay a dividend during the six months preceding an interest payment due date. However, the coupon interest payments for the hybrid securities are cumulative.
The “stable” outlook recognizes TBANK’s designated role as the core bank of the Thanachart Group. TBANK is expected to capitalize on group-wide synergies to strengthen its market position in the banking industry. TBANK’s ratings will benefit if the bank can control any deterioration in the quality of its assets, and strengthen its capital base and loan loss reserves.
TBANK, a core subsidiary of Thanachart Capital PLC (TCAP), by virtue of TCAP’s 50.96% shareholding, was the sixth-largest Thai commercial bank as measured by asset size, with 8.1% market share in loans and 7.2% share in deposits as of June 2013. TBANK’s loan portfolio is now more diversified across other industrial sectors after the bank acquired Siam City Bank PLC (SCIB) in 2010. The diversification has yielded a better loan mix, and has reduced the concentration of retail loans in the loan portfolio. As of June 2013, TBANK’s loan portfolio comprised retail loans (68% of total loans), corporate loans (20%), and small- and medium-sized enterprise or SME loans (10%). TBANK is the largest auto loan provider in Thailand, with approximately 27% market share in auto loans. As of June 2013, the bank’s hire purchase loans accounted for 55% of total loans. TBANK now has a greater credit exposure than in the past. Hire purchase loans have grown rapidly, rising by 39% year-on-year (y-o-y) in 2012, and 9% year-to-date for the first half of 2013. The bank focuses more on high-yielding retail and SME loans to wider its interest margin. In addition, TBANK has concentration risk because it has a number of large-sized corporate loans outstanding. The bank’s asset quality and its capital base may deteriorate if these loans become non-performing loans (NPLs), especially during an economic downturn.
Effective in May 2013, TBANK sold its life insurance business, which had been operated by its subsidiary, Thanachart Life Assurance Co., Ltd. (TLIFE). TBANK sold the business to Prudential Life Assurance (Thailand) PLC (PRU), for approximately Bt17.5 billion. The proceeds from the sale of TLIFE have been used to fund TBANK’s normal operations, that is, expand its loan portfolio. TBANK is now a business partner of PRU in bancassurance services. With the expertise in the insurance business coming from PRU, plus the large branch network of TBANK, TBANK is likely to benefit from this cooperation. TBANK expects to enlarge its bancassurance service fee income.
TBANK’s risk management system has improved, in an effort to comply with international standards. However, TBANK’s credit profile has been constrained by a high level of NPAs (the sum of classified loans more than three months overdue, plus restructured loans and foreclosed property), which mostly came from the recent acquisition of SCIB’s commercial loan portfolio. TBANK improved the quality of its loan portfolio by resolving its legacy NPLs. The NPL balance declined from Bt36.9 billion in 2010 to Bt32.5 billion in 2012. However, TBANK incurred new large NPLs during the second quarter of 2013. NPLs rebounded to Bt34.8 billion as of June 2013, or 7% higher than the level in December 2012. The ratio of NPLs to total loans fell from 6.06% in 2010 to 4.30% in 2012, but rose to 4.41% as of June 2013. To strengthen its balance sheet, TBANK set aside greater amounts of reserves for loan losses in the first half of 2013. As a result, the bank’s ratio of loan loss reserves to NPLs rose to 86% as of June 2013, from 75% in 2012. This ratio, however, remains far lower than the industry average of 134% as of June 2013. While the Thai economy remains weak, TBANK faces a continuing challenge to control asset quality, as well as to add to its cushion of reserves for loan losses.
TBANK’s financial performance improved after the successful business integration of TBANK and SCIB. In 2012, TBANK reported net profit of Bt8.4 billion, a 10% y-o-y rise. The improvement in net profit was caused primarily by an increase in non-interest income and the control of operating costs. During the second quarter of 2013, the bank recorded a one-time gain from divesting TLIFE. As a consequence, net profit totaled Bt10.4 billion for the first half of 2013. Return on average assets (ROAA) rose to 0.89% in 2012, and to 1.02% (non-annualized) for the first six months of 2013. Despite the improvements, TBANK’s profitability remains relatively weak compared with its peers.
TBANK’s regulatory capital base remains sufficient to support its growth plans for the next three years. As of June 2013, the Tier 1 capital ratio and the total capital ratio were 8.34% and 13.89%, respectively. Despite being above the minimum requirements of 6.00% and 8.50% set by the Bank of Thailand (BOT), TBANK’s ratios remained below the industry averages of 11.67% and 15.54%.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2013, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.