TRIS Rating has assigned a rating of “A” to the proposed issue of up to Bt10,000 million in Basel III-Compliant hybrid Tier 2 capital securities of Thanachart Bank PLC (TBANK). At the same time, TRIS Rating has affirmed the company rating of TBANK at “AA-”, and has affirmed the ratings of the bank’s existing subordinated debentures and hybrid debt capital securities at “A+” and “A”, respectively. The outlook remains “stable”. The ratings reflect TBANK’s experienced management team and the bank’s strong market position in its core line of business, hire purchase lending. The ratings also take into account recent improvements in TBANK’s risk management system and the support it receives from its Canadian strategic partner, Bank of Nova Scotia (BNS), which holds a 49% stake in TBANK through Scotia Netherlands Holdings BV. The ratings, however, are constrained by TBANK’s weak asset quality, a relatively low but improved cushion of loan loss reserves, the current slowdown in the Thai economy, and the current political uncertainty.
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 prior to the maturity dates, if the call date is at least five years after issuance and as long as the bank has received approval from the Bank of Thailand (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 “A” rating for TBANK’s new hybrid Tier 2 capital securities reflects the subordination risk of the securities, and the nonpayment risk of the securities as defined by the non-viability loss absorption clause. The features of the securities comply with the BASEL III guidelines and are qualified as Tier 2 capital under the BOT’s criteria. The securities will be classified as Tier 2 capital, subject to approval from the BOT. The securities are subordinated, unsecured, non-deferrable, and convertible. 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 can be converted into common shares in the event that the regulator deems the bank to be non-viable, in accordance with the non-viability clause.
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 loans and to broaden its deposit base. The outlook also reflects the expectation that the bank can control the deterioration in the quality of its loans, as well as strengthen its capital base and add to its 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. TBANK had a 7.8% market share in loans and a 6.5% share in deposits as of March 2014. TBANK is the largest auto loan provider in Thailand, with approximately 24% market share in auto loans as of December 2013. At the end of March 2014, the bank’s hire purchase loans outstanding amounted to Bt436.8 billion, accounting for 55% of total loans. TBANK’s loan portfolio is currently more diversified across all industrial sectors after the bank acquired Siam City Bank PLC (SCIB) in 2010. As of March 2014, the bank’s loan portfolio comprised retail loans (69% of total loans), corporate loans (19%), small and medium-sized enterprise (or SME) loans (10%), and other loans (2%).
TBANK has a great deal of credit exposure because it rapidly expanded its loan portfolio in 2012. In addition, the bank now concentrates more on high-yielding retail and SME loans to widen its interest margin. However, because of the current economic slowdown, TBANK has granted new loans more prudently. In 2013, the bank’s loan portfolio expanded by only 5%, compared with a 19% year-on-year (y-o-y) growth rate in 2012. At the end of March 2014, loans and receivables were Bt790.1 billion, down by 0.1% from the balance as at December 2013.
TBANK’s credit profile has been constrained by a high level of non-performing assets (NPAs, the sum of classified loans more than three months overdue, plus restructured loans and foreclosed property). The high level is in part a legacy of the acquisition of SCIB’s commercial loan portfolio. TBANK’s loan quality is now deteriorating as the economy worsens. The value of the bank’s non-performing loans (NPLs) rose from Bt32.5 billion in 2012, to Bt35.3 billion in 2013, and to Bt36.1 billion as of March 2014. The ratio of NPLs to total loans was 4.57% as of March 2014, compared with 4.30% in 2012. TBANK’s reserves for loan losses are sufficient but still relatively low. As of March 2014, the bank’s NPL coverage ratio (loan loss reserves as a percentage of NPLs) was 85%, which is below the industry average. As long as the Thai economy remains weak, TBANK faces two continuing challenges: controlling asset quality, and adding to its cushion of reserves for loan losses.
TBANK’s profitability is relatively weak compared with its peers. In 2013, TBANK delivered a net profit of Bt15.6 billion, an 82% y-o-y rise. Net profit increased mainly because TBANK recorded a one-time gain from divesting the life insurance segment. Return on average assets (ROAA) rose to 1.52% in 2013, but remained below the industry average. For the first quarter of 2014, net income was Bt2.6 billion, a 13% y-o-y decline. The non-annualized ROAA was 0.26%, compared with 0.30% for the same period last year.
TBANK’s regulatory capital base remains sufficient to support its growth plans for the next few years. As of March 2014, the Tier 1 capital ratio and the total capital ratio were 9.25% and 14.00%, respectively. Despite being above the minimum requirements of 6.00% and 8.50% set by BOT, TBANK’s ratios remain below the industry averages.
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