TRIS Rating has assigned a rating of “A” to the proposed issue of up to Bt50,000 million in senior unsecured debentures of TISCO Bank PLC (TISCOB), a 99.99% owned subsidiary of TISCO Financial Group PLC (TISCO). At the same time, TRIS Rating has affirmed the company rating of TISCOB 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, as of March 2015, with a 2.3% market share in loans and a 1.8% 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. At the end of 2014, TISCOB was the fourth-largest of 16 auto loan providers in TRIS Rating’s database, with approximately 11% market share.
TISCOB’s loan portfolio grew rapidly during 2011 and 2013, partly driven by an economic stimulus package implemented by the previous government. However, since 2014, the Thai economy has been slowed and auto sales have been sluggish. As a consequence, TISCOB’s new loans declined in 2014 through the first quarter of 2015. As of March 2015, loans and receivables were Bt250.4 billion, falling by 9% from the level in March 2014.
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 at the end of March 2015. The ratio of NPLs to total loans rose to 2.37% as of March 2015, from 1.23% in 2011. Despite the recent rise, the bank’s NPL ratio remains below the industry average. In addition, as of March 2015, TISCOB has maintained a sufficient level of reserves for loan losses, with reserves equaling 185% of the minimum level of reserves set by BOT.
TISCOB delivered net income of Bt3.1 billion in 2014, up by 8% year-on-year (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. For the first quarter of 2015, TISCOB’s net profits were Bt0.8 billion, up by 17% from the same period last year. Net profits increased because the bank’s funding costs and credit costs declined.
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 bank’s regulatory capital base is adequate to fund its expansion efforts over the next few years. As of March 2015, TISCOB reported a Tier 1 ratio and a total capital ratio (BIS ratio) of 12.69% and 17.14%, respectively, above the minimum requirements of 6.00% and 8.50% set by the BOT.
Company Rating: A Issue Ratings: TISCO20DA: Bt1,000 million subordinated debentures due 2020 A- TISCO22DA: Bt1,243 million subordinated debentures due 2022 A- TISCO223A: Bt1,000 million hybrid Tier 2 capital securities due 2022 BBB+ Up to Bt50,000 million senior unsecured debentures due within 2020 A Rating Outlook: Stable
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