TRIS Rating has affirmed the company rating of Thanachart Bank PLC (TBANK) at “AA-”, and has affirmed the ratings of the bank’s existing subordinated debentures and hybrid Tier-2 capital securities at “A+” and “A”, respectively. The outlook remains “stable”. The ratings reflect TBANK’s strong franchise in its core line of business, auto hire-purchase lending. The ratings also take into account the strong support TBANK receives from its Canadian strategic partner, Bank of Nova Scotia (BNS), which holds a 49% stake in TBANK through Scotia Netherlands Holdings B.V. The ratings, however, are constrained by TBANK’s weak asset quality, a relatively low but rising cushion of loan loss reserves, and the current slowdown in the Thai economy.
The “A” rating for TBANK’s 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 are subordinated, unsecured, non-deferrable, and convertible. The securities are also callable by TBANK 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 TBANK’s senior unsecured 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 TCAP and its subsidiaries (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, is the sixth-largest Thai commercial bank as measured by asset size. TBANK had a 7.6% market share in loans and a 6.9% share in deposits as of June 2014. TBANK’s loan portfolio is now more diversified across a greater number of industrial sectors after the bank acquired Siam City Bank PLC (SCIB) in 2010. As of June 2014, the bank’s loan portfolio comprised retail loans (68% of total loans), corporate loans (20%), small and medium-sized enterprise (SME) loans (10%), and other loans (2%). TBANK is the largest auto loan provider in Thailand, with approximately 24% market share in auto loans at the end of 2013. On a consolidated basis as of June 2014, TBANK’s auto hire-purchase loans outstanding amounted to Bt431.6 billion, accounting for 55% of total loans.
TBANK has a greater credit exposure because it has concentrated more on high-yielding retail and SME loans in order to widen its interest margin. In addition, TBANK rapidly expanded its loan portfolio in 2012, with a 19% year-on-year (y-o-y) growth rate. However, because of a slowing economy and sluggish auto sales, TBANK has granted new loans more prudently. As a result, the bank’s loan portfolio expanded by only 5% y-o-y in 2013. At the end of June 2014, loans and receivables were Bt782.7 billion, down by 0.1% from the balance at the end of 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 due in part to a legacy of the acquisition of SCIB’s commercial loan portfolio. TBANK’s loan quality has deteriorated as the economy has worsened. 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 Bt36.0 billion as of June 2014. The ratio of NPL to total loans was 4.6% as of June 2014, compared with 4.3% in 2012. To strengthen its reserves, TBANK added a cushion to its reserves for loan losses in 2013. Despite the increase in its reserves, TBANK’s allowance for loan losses, as a percentage of the Bank of Thailand (BOT) minimum requirement, remained lower than its peers. As of June 2014, the bank’s NPL coverage ratio (loan loss reserves as a percentage of NPLs) was 85%, which is far below the industry average. As long as the Thai economy remains weak, TBANK faces two continuing challenges: asset quality control, and loan loss reserve enlargement.
TBANK’s profitability has improved but remains 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 largely because TBANK recorded a one-time gain of Bt12.3 billion from divesting its subsidiary, Thanachart Life Assurance Co., Ltd. (TLIFE). At the same time, TBANK set aside extra provisions for loan losses amounting to around Bt5.4 billion. If these two extraordinary items are excluded from TBANK’s operating results, net income would increase by about 18% y-o-y. The adjusted return on average assets (ROAA) was approximately 0.98%, which is still far below the industry average. For the first half of 2014, net income totaled Bt5.0 billion, up by 3% from the net income (excluding two extraordinary items) reported for the same period last year. Despite the improvement, TBANK’s profitability may fall if its credit cost rises substantially because of further deterioration in its loan portfolio.
TBANK’s regulatory capital base has improved, and it is adequate to support its growth plans for the next few years. As of June 2014, the Tier-1 capital ratio and the total capital ratio were 9.93% and 15.59%, respectively, above the minimum requirements of 6.00% and 8.50% set by the BOT. TBANK’s total capital ratio was comparable with the industry average but its Tier-1 capital ratio remained lower than the industry average.
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