TRIS Rating has assigned a rating of “BBB” to the proposed issue of up to Bt4,000 million in hybrid Tier 2 capital securities of Land and Houses Bank PLC (LH BANK), a wholly-owned subsidiary of LH Financial Group PLC (LHFG). At the same time, TRIS Rating has affirmed the company rating of LH BANK at “A-”. The outlook remains “stable”. The ratings reflect LH BANK’s continual improvements in its business and financial profiles after it became a universal bank. The ratings take into consideration LH BANK’s successful efforts to broaden and diversify its loan portfolio, the good quality of its loan portfolio, as well as the business and financial support LH BANK receives from LHFG’s major shareholders. However, the ratings are constrained by the bank’s small market shares in loans and deposits, its reliance on just a few revenue sources, relatively weak profitability, and the current slowdown in the Thai economy.
The “BBB” rating for LH BANK’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 criteria of the Bank of Thailand (BOT). However, the securities will be classified as Tier 2 capital, subject to approval from the BOT. The securities are subordinated, unsecured, non-deferrable, and non-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 LH BANK’s senior unsecured debt securities. The principal of the securities can 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 LH BANK will expand its loan portfolio prudently and stabilize its earnings. The outlook is also based on LH BANK’s ability to keep the quality of its loan portfolio from deteriorating further, its ability to maintain a capital buffer sufficient to absorb any unexpected losses, and its ability to secure stable sources of funding at reasonable prices.
LH BANK’s credit profile could be negatively impacted if any deterioration in its loan quality causes large increases in its credit costs or if its capital buffer materially decline. In contrast, the credit upside is limited in the near term, unless the bank’s market position and its capital base improve significantly. These improvements may be difficult to achieve in the short term due to the weak economy and vigorous competition.
LH BANK started as a retail bank in December 2005. The bank was permitted to widen its scope of business after it was granted a universal banking license in December 2011. LH BANK is a core subsidiary of LHFG, the financial holding company of Land and Houses Group. LHFG’s major shareholders comprise Land & Houses PLC (LH, rated “A+” by TRIS Rating), Quality Houses PLC (QH, rated “A-”), and Ms. Piengjai Harnpanich, holding 34%, 21%, and 17%, respectively, as of April 2014. LH BANK gains synergistic benefits from its connections with a group of affiliated companies. The synergies help LH BANK enlarge its business and customer base. As of December 2014, LH BANK was ranked 13th among 17 Thai commercial banks in terms of asset size, with a 1.1% market share in loans and a 1.1% share in deposits. LH BANK recently added many micro branches, strengthening its banking channel and building a foundation for future growth. The bank’s operating platform and systems have been continuously improved to enhance efficiency.
LH BANK’s loan portfolio has expanded rapidly, rising at a compound annual growth rate of 27% from 2010 to 2014. The growth came largely from increases in corporate lending as well as loans to small and medium-sized enterprises (SMEs). As of December 2014, LH BANK’s loan portfolio comprised corporate loans (52%), SME loans (20%), and retail loans (28%). After becoming a universal bank, LH BANK has focused more on corporate loans. A substantial rise in the value of large loans increased LH BANK’s exposure to loan concentration risk from the large borrowers. However, amidst the current economic slowdown, LH BANK now grants new loans more carefully. As of December 2014, loans and receivables increased to Bt116.3 billion, up by 12% from December 2013.
LH BANK’s loan quality remains relatively good, despite a slight deterioration. The ratio of non-performing loans (NPLs) to total loans rose slightly, from 1.9% in 2012 to 2.1% in 2014. This level is still below the industry average. Nonetheless, the quality of LH BANK’s housing loans has deteriorated as illustrated by an increased number of NPLs. At the end of 2014, the NPL ratio for housing loans was 4.3%, up from 2.7% in 2012. To strengthen its cushion of reserves, LH BANK added to its excess reserves for loan losses in order to absorb any future deterioration in loan quality. As of December 2014, the bank’s loan loss reserves accounted for 165% of the minimum requirement set by BOT, up from 115% in 2012.
LH BANK’s profitability is relatively low. Its return on average assets (ROAA) is less than the industry average. LH BANK can control its funding costs by attracting more retail deposits, now that it has extended its branch network. Since 2012, LH BANK’s interest spread has widened gradually, but it was still the lowest in the industry. In 2014, LH BANK reported a net profit of Bt1.2 billion, rising by 34% year-on-year (y-o-y). The improvement in net profit is largely driven by increases in net interest income and non-interest income. Net interest income rose as loan portfolio grew, while non-interest income increased from gains on the sales of investments. Compared with other commercial banks, the gains on the sales of investments comprised a much larger proportion of LH BANK’s profit, making LH BANK’s financial performance more volatile relative to its peers.
LH BANK’s capital buffer has declined, as the result of the rapid expansion of the loan portfolio. However, the capital base is likely sufficient to support the bank’s expansion efforts over the next few years. As of December 2014, LH BANK reported a Tier-1 capital ratio of 11.32% and a total capital ratio (BIS ratio) of 12.41%. Both measures are above the minimum BOT requirements.
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