TRIS Rating has affirmed the company rating of TISCO Bank PLC (TISCOB), a 99.99% owned subsidiary of TISCO Financial Group PLC (TISCO), at “A”, and has affirmed the ratings of TISCOB’s subordinated debentures and hybrid Tier 2 capital securities at “A-” and “BBB+”, respectively. The outlook remains “stable”. The ratings reflect TISCOB’s strong competitive position in auto hire-purchase lending, and a recent increase in its capital funds. However, the ratings are constrained by the bank’s small market shares in loans and deposits, its deteriorating loan quality, and its reliance on wholesale funding. In addition, the current slowdown in the Thai economy, the high level of household debt, and the sluggishness of domestic auto sales may affect the bank’s competitiveness, the quality of its loan portfolio, and its profitability.
The “BBB+” rating for TISCOB’s hybrid Tier 2 capital securities (TISCO223A) reflects the subordination risk of the securities and the nonpayment risk of the securities, as defined by the non-viability loss absorption clause in the bond indenture. The features of the securities comply with the Basel III guidelines and the securities are qualified as Tier 2 capital under the Bank of Thailand (BOT)’s criteria. The securities are subordinated, unsecured, non-deferrable, and non-convertible. The securities are also callable by TISCOB 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 TISCOB’s depositors and holders of TISCOB’s senior unsecured debentures. 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 TISCOB will sustain its strong competitive position in auto hire-purchase lending, and maintain an adequate level of capital funds. The outlook is also based on the assumption that TISCOB’s loan quality will not deteriorate further.
The credit profile of TISCOB could be negatively impacted if any further shrinkage in TISCOB's loan portfolio causes its profitability to decline significantly, or if a substantial drop in the quality of its loan portfolio causes its credit cost to rise significantly. In contrast, any credit upside is unlikely in the near term due to the limited prospects for the hire-purchase segment and the weak economy.
TISCO was ranked ninth among 17 Thai commercial banks in terms of asset size at the end of 2014, with a 2.5% market share in loans and a 1.9% share in deposits. TISCOB, the core bank of TISCO, focuses on its niche market, auto hire-purchase lending. Auto loans were the bank’s largest loan portfolio, accounting for 63% of its total loans as of December 2014. The expertise of its management team has enabled TISCOB to maintain its market position in auto hire-purchase lending. As of December 2013, TISCOB was the fourth-largest of 16 auto loan providers in TRIS Rating’s database, with approximately 12% market share.
Over 2009-2013, TISCOB’s auto loan portfolio grew rapidly, at a compound annual growth rate of 20%. The opportunity to expand came when the previous government implemented an economic stimulus package. However, as of December 2014, auto loan portfolio contracted by 10% from the prior year, as a result of the economic slowdown. In addition, TISCOB’s corporate loans, and small and medium-sized enterprises (SME) loans decreased in 2014, after both of these loan portfolios had grown substantially during 2009-2013. As a result, at the end of 2014, TISCOB’s loans and receivables totaled Bt258.6 billion, down by 8% year-on-year (y-o-y).
Despite its efforts to diversify across a wider range of industry segments, TISCOB still faces loan concentration risk because it has a few very large borrowers. In addition, based on its risk-adjusted return profile, TISCOB has taken on more higher-risk loans so as to achieve a sustainable level of profits. The bank’s capital buffer may deteriorate should such loans become troubled loans.
TISCOB’s loan quality has deteriorated. The amount of non-performing loans (NPLs) leaped from Bt2.2 billion in 2011 to Bt5.9 billion in 2014. The ratio of NPLs to total loans rose to 2.3% in 2014, from 1.2% in 2011. Despite the rises, the bank’s NPL ratio remains below the industry average. In addition, in 2014, TISCOB has maintained a sufficient level of reserves for loan losses, with reserves equaling 180% of the minimum level of reserves set by BOT.
TISCOB delivered net income of Bt3.1 billion in 2014, up by 8% y-o-y. Net interest income increased because of its wider interest spread. However, the bank’s funding costs remained high, compared with the industry average. In addition, the bank’s credit cost has increased, following an increase in new NPLs. In 2014, TISCOB’s provisions for loan losses as a percentage of average loans were 1.5%, above the industry average. Return on average assets (ROAA) in 2014 was 0.96%, increasing slightly from 0.93% in 2013.
In terms of funding and liquidity, TISCOB has relied on wholesale funding, which tends to be a more volatile funding source than retail funding. The bank’s liquidity may weaken, should a large number of depositors or lenders wish to withdraw their funds at once.
TISCOB’s capital base has strengthened after it raised new capital funds during 2013 and 2014. The ratio of equity to assets rose from 5.5% in 2012 to 7.9% in 2014. However, TISCOB’s ratio remains the lowest in the industry. TISCOB has utilized the Basel III Internal Rating Based (IRB) approach to calculate the regulatory-mandated amount of capital needed as a buffer for its credit risk. This approach helps the bank improve the efficiency of its risk management and capital management activities. The bank’s regulatory capital base is adequate to fund its expansion efforts over the next few years. As of December 2014, TISCOB reported a Tier 1 ratio and a total capital ratio (BIS ratio) of 12.55% and 16.80%, respectively, above the minimum requirements of 6.00% and 8.50% set by the BOT.
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