TRIS Rating has affirmed the company rating of Police General Hospital Saving and Credit Cooperative Ltd. (PHSC) at “BBB+” with “stable” outlook. The rating reflects the status of PHSC as a captive financial service provider for PHSC’s members who work at the Police General Hospital (PGH) and related entities. The rating is also supported by the strong credit profile of PGH as a government entity, the good quality of outstanding loans, and the capability of PHSC’s management team to deliver satisfactory financial performance. The legal privileges extended to savings cooperatives also secure loan quality and enhance the competitive edge of PHSC over traditional financial institutions. However, PHSC’s credit strengths are partially offset by its aggressive funding policy which relies heavily on deposits from affiliate members, the risk of overdependence on one key member of the management team, and relatively weak capitalization compared with other long-established savings cooperatives.
The “stable” outlook reflects the expectation that PHSC will be able to maintain its deposit base and deliver performance which will enable satisfactory returns to be paid to its ordinary members.
The credit upsides are limited due to a limited scale of employment entity which will enable PHSC in significantly expanding its asset size and get benefits from the economy of scales, a high possibility of dependence on one key person in the medium term. On the contrary, a change in the key member of the management team or any changes which make important operating policies more aggressive, or any regulatory changes that reduce privileges for savings cooperatives might impact the rating.
PHSC was set up in 2002 as a savings cooperative for PGH’s personnel. PHSC provides limited financial services for its members mainly including taking deposits and providing loans. Savings cooperatives have some advantages over traditional financial institutions due to special legal privileges. PHSC and its members are exempt from all major taxes. The high credit quality of loans granted to PSHC’s ordinary members, as is the traditional practice of savings cooperatives, is due to PHSC’s practice of providing loans to ordinary members through agreements with their employers. Loan repayments can be deducted from ordinary member’s monthly payroll. According to cooperative laws, PHSC has the first priority claim over any other creditors, except for any legal obligation to pay under a specific law. This legal support reduces the credit risk of PHSC’s loans to its members and sustains the cash inflows from loan repayments made to the cooperative. In addition, the strong credit profile of PGH, together with the job security of its members as employees of a government entity, has ensured the stability of the number of ordinary members. This stability continuously increases PHSC’s capital base through the monthly obligation of ordinary members to purchase PHSC’s shares.
PHSC’s total assets grew continuously, rising from Bt3,635 million at the end of fiscal year (FY) 2011 (ending 30 September 2011) to Bt6,126 million in FY2014. Total asset grew substantially to Bt9,601 million at the end of June 2015. PHSC is classified as a relatively large savings cooperative among the approximately 1,400 savings cooperatives. However, PHSC’s current asset size is relatively small when compared with one long-established largest savings cooperative which has total assets of more than Bt80,000 million.
The employees of the PGH and its related entities are the only people who are qualified to be ordinary members of PHSC. This type of membership criterion is a normal requirement of traditional savings cooperatives. PHSC also has affiliate members, as other savings cooperatives do. By offering all members attractive interest rates and tax-exempt interest income, PHSC has been able to raise a substantial amount of funds through savings deposits made by affiliate members. From the total of members’ deposits, approximately 80% were from affiliate members and 20% were from ordinary members. PHSC’s liquidity risk depends on the roll-over rate of the deposit base, especially from affiliate members who have no relationship with either PHSC or PGH and have no other benefits besides attractive interest rates on deposits. Thus, PHSC remained exposed to liquidity risk to a certain extent. PHSC has mitigated this risk by maintaining an adequate portion of liquid assets and unused credit facilities with traditional financial institutions. TRIS Rating expects that as long as PHSC is able to gain tax privileges to offer attractive interest rates, coupled with a conservative investment policy to maintain a relatively high portion of liquid assets, the level of liquidity risk is acceptable.
PHSC has expanded the amount of loans made to other savings cooperatives since FY2010. These loans are expected to yield returns higher than the returns from the investment portfolio. As of late, demand for loans from members has remained quite small, due to the profiles of its ordinary members. The loan portfolio maintained at 45% of total assets during FY2010-FY2012 and increased to 52% and 54% at the end of FY2013 and FY2014, respectively. At the end of June 2015, 91% of the loan portfolio was loans made to other savings cooperatives while the remainder was loans made to ordinary members. PHSC has been able to mitigate its loan concentration risk on loans made to other cooperatives by expanding its borrower base. PHSC has had no non-performing loans (NPLs) (overdue more than 90 days) since FY2007, whether counting loans made to other savings cooperatives or loans made to ordinary members. According to the default of one largest credit union because of a massive fraud, PHSC has no business transaction with that credit union.
The portion of loans has risen continuously since FY2010. However, the ratio of loans to adjusted deposits remained relatively low at 56.4% in FY2014, despite rising from 46.1% and 54% at the end of FY2012 and FY2013, respectively. PHSC still delivered outstanding performance in terms of net income. Net income increased substantially from Bt73 million in FY2013 to Bt148 million in FY2014, mainly due the wider spread from higher yields. The return on average assets (ROAA) improved 2.6% in FY2014, rising from 1.5% in FY2013. The return on average cooperative’s equity (ROAE) also rose from 16.3% in FY2013 to 23.8% in FY2014. PHSC has been able to pay dividends to shareholders at the maximum level allowed by law at 10% of paid-up shares since FY2009. PHSC’s financial position and performance are highly dependent on a key member of the management team. PHSC has been developing and implementing standard operating policies and procedures, as well as obtain various support tools to cover all of its main business activities. This will help mitigate the risk of an over-reliance on one person.
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