TRIS Rating has affirmed the company rating of TISCO Bank PLC (TISCOB), a 99.99% owned subsidiary of TISCO Financial Group PLC (TISCO), at “A”, and has affirmed the rating of TISCOB’s subordinated debentures at “A-”. At the same time, following TRIS Rating’s revised criteria, TRIS Rating has lowered the rating of the bank’s existing Basel III hybrid Tier-2 securities (TISCO223A) by one notch, from “A-” to “BBB+”. The rating for the Basel III hybrid Tier-2 securities is revised to be two notches below the company rating. The outlook remains “stable”. The lower rating reflects the subordination risk of the securities, and the nonpayment risk under the non-viability loss absorption clause of the securities.
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 the good quality of its outstanding loans, despite some recent deterioration in the loan portfolio. However, the ratings are constrained by the bank’s small market shares in loans and deposits, its limited distribution network, relatively high funding costs, and a high level of financial leverage. In addition, TISCOB faces uncertainty from the recent slowdown in the Thai economy and the uncertain domestic political situation. These forces might pressure the bank’s long-term competitiveness, the quality of its assets, its profitability, and the stability of its capital base.
The “BBB+” rating for TISCOB’s hybrid Tier-2 securities (TISCO223A) reflects the subordination risk of the securities and the nonpayment risk of the securities under non-viability loss absorption clause of the securities. The securities are classified as Tier-2 capital. The features of the securities are qualified under the BOT’s criteria. The BOT criteria comply with the BASEL III guidelines. The securities are subordinated, unsecured, non-convertible, and non-deferrable. The securities are also callable by the issuer prior to the maturity date, if 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 securities are subordinated to depositors and holders of the issuer’s senior debt securities. The principal of the securities is allowed to be written down in the event that the regulator deems the bank to be non-viable, in accordance with the non-viability clause.
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 strengthening 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 2013, with a 2.9% market share in loans and a 2.6% share in deposits. TISCOB has continually expanded its loan portfolio. The loan portfolio grew at a compound annual growth rate of 23% over the past five years. As of December 2013, TISCOB’s loans and receivables totaled Bt281.3 billion, up by 18% year-on-year (y-o-y). 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 fourth-largest of 16 auto loan providers in TRIS Rating’s database, with approximately 12% market share at the end of 2013. The value of TISCOB’s hire purchase loan portfolio reached Bt178.4 billion in 2013, thanks to year-on-year growth of 15%. 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 loans made to 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. In addition, based on risk-adjusted return profile, TISCOB has taken on more higher-risk loans so as to achieve a sustainable level of profits. The bank’s capital buffer may deteriorate should such loans become troubled loans.
TISCOB has an effective risk management system in place to control its asset quality. However, the bank’s loan quality has deteriorated as the result of the unfavorable economy. The amount of non-performing loans (NPLs) leaped from Bt2.2 billion in 2011 to Bt2.8 billion in 2012, a 25% rise, and to Bt4.3 billion in 2013, a 53% rise. The ratio of NPLs to total loans has climbed from 1.16% in 2012 to 1.51% in 2013. Despite the rises, the bank’s NPL ratio remains the lowest in the commercial banking industry. In addition, TISCOB has maintained a sufficient level of reserves for loan losses, with reserves equaling 136% of NPLs in 2013.
In 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’s funding costs remained high, compared with the industry average. In addition, the bank set up a substantial provision for loan losses, following an increase in NPLs. In 2013, the bank’s credit cost was Bt3.6 billion, soaring by 133% y-o-y. As a result, net profit in 2013 was Bt2.9 billion, up by only 4% y-o-y. Return on average assets (ROAA) in 2013 was 0.93%, down from 1.13% in 2012 and 1.41% in 2011.
In terms of funding and liquidity, TISCOB has relied on wholesale funding, which tends to be a more volatile funding source than retail deposits. In 2013, funds from large depositors and lenders (deposits or borrowings valued at more than Bt10 million) accounted for 81% of TISCOB’s funding base. 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 bank added Bt1.9 billion in equity capital in 2013. However, the ratio of equity to assets was 5.7% in 2013, the lowest in the industry. 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 over the next three years. As of December 2013, TISCOB reported a Tier-1 ratio and a total capital ratio (BIS ratio) of 9.15% and 13.37%, respectively. These ratios remain above the minimum requirements of 6.00% and 8.50% set by the Bank of Thailand (BOT).
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