TRIS Rating has assigned a “AA-” rating to the proposed issue of up to Bt2,000 million in senior unsecured debentures due within 2017 of Secondary Mortgage Corporation (SMC). At the same time, TRIS Rating has affirmed the company and current senior unsecured debenture ratings of SMC at “AA-”. The outlook remains “stable”. The proceeds from the issuance of the new debentures will be used to refinance SMC’s existing debt, purchasing housing loans, and SMC’s working capital needs. The ratings reflect the continual improvement in SMC’s stand-alone business profile and financial profile, and the strong support SMC receives from the government. For the stand-alone rating, SMC has had better prospects after it began successful cooperative efforts with several leading commercial banks. Its loans portfolio in 2013 has almost double in value from the end of 2012. SMC has been profitable for six years, despite having volatile earnings. However, the stand-alone rating is constrained by challenges to control asset quality after its sizable expansion during 2011-2013, and ability to maintain sufficient capital base in the medium term. The “stable” outlook reflects the medium-term expectation that the SMC’s management team will be able to improve operating efficiency and control asset quality. The outlook is also based on the expectation that SMC can increase the size of its portfolio by acquiring loans from allied financial institutions as planned. The outlook also reflects the expectation that SMC’s relations with the government and related state entities, along with the business and financial support it receives from the government, remain unchanged in the future.
SMC is a special financial institution (SFI), 100% owned by the Ministry of Finance (MOF), with a mission to promote the Thai secondary mortgage market. SMC has a competitive advantage by virtue of the special legal and regulatory support it receives, plus the tax privileges granted to SMC under the Emergency Decree on Secondary Mortgage Finance Corporation B.E. 2540 (the SMC Act). The government also shows its support by injecting funds into SMC for the current budget year.
SMC was incorporated in 1997, under the SMC Act, with initial capital of Bt1,000 million. Under the Act, the government can guarantee the debt issued by SMC. However, the guarantee cannot exceed four times SMC’s capital. In January 2009, the MOF injected Bt100 million of new capital into SMC. The MOF recently approved an addition Bt130 million injection of new capital for the 2014 budget year. The new capital will enable SMC to acquire from Bt27,000 million to Bt31,000 million in mortgage loans. SMC’s board of directors comprises representatives from the private sector and from various governmental entities, including the Fiscal Policy Office, the Bank of Thailand (BOT), the Securities and Exchange Commission (SEC), the Government Housing Bank (GHB), and the Land Department, together with no more than four qualified directors plus SMC’s managing director (MD). The composition of its board has been carefully designed to support SMC’s mission.
SMC was established to create a secondary mortgage market and make long-term fixed rate mortgage loans available to home owners. About 80% of SMC existing loan portfolio comprises mortgage loans acquired from financial institutions. The financial institutions provide mortgage financing services in the primary markets. SMC buys the mortgages, pools the mortgage loans to issue mortgage-backed securities, and then sells the securities to investors.
SMC now has better growth prospects after it fulfilled many of its strategic objectives. For example, SMC expanded its cooperative efforts with many financial institutions. The allied financial institutions sold more loans to SMC. During 2009 and 2013, SMC allied with some financial institutions to purchase mortgage loans. This business channel originated new loans worth Bt152 million as of December 2010 and Bt392 million as of December 2011. In 2012, SMC purchased Bt3,256 million housing loans from its allied financial institutions. As a result of the cooperative efforts with other financial institutions, the value of SMC’s loan portfolio significantly increased. The value rose from Bt1,732 million in 2011 to Bt4,756 million in 2012. In 2013, SMC’s loan portfolio almost doubled to Bt8,610 million.
SMC faces a challenge as it strives to control the quality of its assets. Due to a rise in non-performing loans or NPLs, SMC posted a loss of Bt329 million in 2007, following annual losses of Bt99 million in 2006 and Bt120 million in 2005. SMC wrote off Bt318 million in bad loans in 2007, which pushed the ratio of NPLs to total loans down from 39.79% in 2006 to 6.90% in 2007. The ratio increased to 8.94% in 2008, then jumped to 18.84% in 2011. The ratio dropped to 5.57% in 2012 and decreased to 3.33% in 2013 as the loan portfolio expanded. This NPL to total loan ratio was lower than the average of 5.8% for the eight SFIs as of September 2013, but in line with the average NPL level of 3.38% for all 15 universal banks as of December 2013. Of SMC’s NPLs, 61% were loans acquired before 2008, while 39% of the bad loans were acquired in 2009 through 2013. SMC’s ability to control the quality of the newly acquired loans has yet to be monitored.
SMC’s profitability has improved since 2008. SMC reported a Bt22 million net profit in 2008 after three consecutive yearly losses. SMC then reported Bt26 million in net profit in 2009. In 2010, net profit was only Bt0.3 million, due to a decline in operating income and an increase in the allowance for bad debts and doubtful accounts. The increase in the allowance was required in order to bring SMC into compliance with International Accounting Standard 39 (IAS39). In 2011, net profit recovered to Bt4 million, and increased to Bt9.9 million in 2012 as the loan portfolio grew and the expenses for bad debt and doubtful accounts fell significantly. In 2013, net profit was Bt26 million.
A majority of SMC’s funding base is short-term promissory notes. Short-term promissory notes comprised 84% of SMC’s total funding as of June 2013. In July 2013, SMC issued Bt1,000 million in senior unsecured debentures, reducing the portion of funding from short-term promissory notes to 67% of its total funding. In the fourth quarter of 2013, SMC matched the duration of its loan portfolio by issuing Bt1,500 million in mortgage-backed securities (MBS). SMC has fulfilled its mission to develop the secondary mortgage market. From 2002 through 2013, SMC issued six tranches of MBS and asset-backed securities (ABS) worth in total Bt3,411.5 million. The issuances increased the number and type of alternative securities, such as MBS, available to investors. Lastly, the issuances reduced the current mismatch in the structure of SMC’s assets and liabilities.
SMC utilized its capital base effectively as it expanded during 2012 and 2013. Its BIS ratio, declined from 77.7% in 2011 to 16.98% in 2013. The ratio of shareholders’ equity to total assets also decreased, sliding from 36.29% in 2011 to 8.22% in 2013. TRIS Rating expects SMC will maintain enough capital to absorb any future losses from any adverse changes in the industry.
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