TRIS Rating has assigned the rating of “A+” to the proposed issue of up to Bt500 million in senior unsecured debentures of Thanachart Capital PLC (TCAP). At the same time, TRIS Rating has affirmed the company rating of TCAP and the ratings of its existing senior unsecured debentures at “A+”. The outlook remains “stable”. The ratings are based on TCAP’s position as the investment holding company of the Thanachart Group, its management control of Thanachart Bank PLC (TBANK), the core bank subsidiary, through a 50.96% ownership stake, and the stable stream of dividends it receives from TBANK. The ratings take into consideration TBANK’s strong franchise in auto hire-purchase lending and the 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. However, the ratings are partially offset by TCAP’s weak asset quality, relatively low but rising reserves for loan losses, and the current slowdowns in the auto market and the Thai economy.
TCAP’s company rating is one notch lower than the company rating of TBANK (AA-). The one notch difference reflects the structural subordination of TCAP’s obligations to those of TBANK, TCAP’s reliance on dividends from TBANK, and the supervisory barrier which may affect TBANK’s ability to pay dividends.
The “stable” outlook reflects the expectation that TBANK, as the major source of revenue for TCAP, will maintain its competitive positions in its core lines of business. The outlook is also based on the expectation that TBANK’s loan quality will not deteriorate significantly, despite the current slowdown in the Thai economy.
The credit profile of TCAP could be negatively impacted if TBANK's profitability declines due to its shrinking loan portfolio and rising credit cost. The credit upside for TCAP is limited in the near term due to TBANK's worsened asset quality and the continued shrinking of the auto loan portfolio.
Based on consolidated asset size as of September 2014, TCAP was ranked sixth among all 16 Thai commercial banks, with a 7.5% market share in loans and a 6.6% market share in deposits. In terms of revenues, the banking segment contributed approximately 80% of the consolidated net operating income of TCAP. The remainder was from the operations of other segments, such as leasing, securities, fund management, and distressed asset management.
TBANK now grants new loans more prudently because the Thai economy has slowed down and auto sales remain sluggish. As a consequence, TCAP’s consolidated loans expanded by only 5% in 2013, compared with 19% in 2012. The unfavorable economy has affected its loan portfolio. As of September 2014, TCAP’s loans and receivables amounted to Bt772.8 billion, contracting by 2% from the December 2013 level. The value of the auto hire-purchase loan portfolio, TCAP’s largest, dropped by 6% from the December 2013 level.
TCAP’s risk profile is still handicapped by a high level of non-performing assets (NPA; the sum of non-performing loans (NPLs), plus restructured loans and foreclosed property). Some of the NPAs came to TBANK when it bought SCIB’s (Siam City Bank PLC) loan portfolio. NPLs declined in 2012, but rebounded in 2013 through the first nine months of 2014 as the economy worsened. At the end of September 2014, the consolidated amount of NPLs totaled Bt37.5 billion, rising from Bt34.3 billion in 2012. The ratio of NPLs to total loans climbed from 4.5% in 2012 to 4.9% in September 2014. In 2013, TBANK set aside additional provisions for loan losses so as to strengthen its cushion of reserves. However, TBANK’s excess reserves for loan losses remain lower than its peers. As of September 2014, TCAP’s NPL coverage ratio (loan loss reserves as a percentage of NPLs) was 85%, far lower than the industry average. TCAP faces a continuing challenge to control its NPLs and to add to its cushion of reserves for loan losses.
For the first nine months of 2014, TCAP delivered net income of Bt7.7 billion, down by 46% year-on-year (y-o-y). The sharp decline in net profit was largely due to the net effect from two extraordinary items TBANK incurred in 2013: a one-time gain from divesting the life insurance segment, and extra provisions for loan losses. TCAP’s profitability is relatively weak compared with its peers. TCAP’s return on average assets (ROAA) remains lower than the industry average.
TCAP has a capital base sufficient to support its expansion efforts over the next few years. As of June 2014, the company reported a Tier-1 capital ratio (on a fully consolidated basis) of 8.88% and a total capital ratio of 13.66%. These two ratios were above the minimum requirements of 6.00% and 8.50% set by the Bank of Thailand (BOT).
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