TRIS Rating has affirmed the company rating and the senior unsecured debenture ratings of Ratchthani Leasing PLC (THANI) at “BBB+” with “stable” outlook. The ratings reflect the extensive experience of THANI’s management team in the used car and commercial truck financing business, plus the continuous improvements THANI has made in its operating processes and risk management systems. The ratings also reflect THANI’s steady financial performance and business profile, despite an unfavorable economy. The ratings have taken into consideration the business and financial supports from its major shareholder, Thanachart Bank PLC (TBANK). The ratings of THANI are enhanced from its stand-alone rating because the company is currently classified as a strategically important subsidiary of TBANK. However, the strengths are mitigated by concerns over intense competition and the quality of THANI’s loan portfolio, now that THANI has focused on making hire-purchase loans for commercial trucks. This type of loan is more sensitive to adverse changes in the economy.
The “stable” outlook reflects the expectation that THANI’s experienced management team, improving operating efficiency, and support from its parent company will enable THANI to expand its loan portfolio in the market segments it has targeted. Loan quality is expected to be controlled and maintained at an acceptable level. In addition, THANI’s profitability is expected to be maintained. The support THANI receives from its parent company is expected to continue, especially the provision of credit facilities.
THANI’s credit ratings could be revised upward if the company can maintain its market position and continuously improve its financial performance and asset quality. In addition, a rating upgrade will be considered if THANI is one of the solo consolidated subsidiaries of TBANK under the Bank of Thailand (BOT)’s consolidated supervision platform. THANI’s strategically important relation to TBANK is reflected in TBANK’s stronger commitment to support its affiliate. The ratings could be negatively impacted if the company’s market position weakens, or if loan quality deteriorates enough to affect its financial profile. If THANI’s strategic importance to TBANK is lessened, the ratings would be affected.
THANI has been a subsidiary of TBANK since 2010, after Siam City Bank PLC (SCIB) and TBANK merged and undertook a recapitalization. TBANK now includes THANI as one of its subsidiaries on a non-solo consolidation basis, consistent with consolidated supervision regulations issued by the BOT. Although THANI’s main line of business overlaps with TBANK’s auto loan business, the two entities offer different products and target different market segments. TBANK intends to have THANI focus on market segments which TBANK has not yet penetrated. TBANK has helped THANI develop its underwriting and collection processes to improve operational efficiency. THANI has implemented a number of risk management policies to comply with the standards required by TBANK. Lastly, THANI has changed its information technology and accounting systems for hire-purchase lending. It now uses TBANK’s system. THANI has been closely supervised by its parent bank and is indirectly supervised by the BOT through the parent bank.
THANI has been focusing its efforts on the commercial truck segment since 2006. Loans made to this segment constituted 68% of the company’s total hire- purchase loan portfolio at the end of June 2015. Commercial truck hire-purchase lending is quite sensitive to adverse changes in the economy. THANI compensates for the increased risk in this new customer segment by charging higher interest rates, requiring high down payments, and calling for post-dated payment cheques.
THANI gained more financial flexibility after it became TBANK’s subsidiary. THANI can now receive greater levels of business and financial supports from its parent bank. The supports it receives have enhanced THANI’s competitive position and boosted its efforts to expand. THANI has been able to continuously improve its market position, as shown by the continued growth in its loan portfolio. Outstanding loans grew at double-digit annual rates from 2007 to 2013 or the equivalent of a six-year compound annual growth rate (CAGR) of 45%. Outstanding loans rose from Bt2,854 million in 2007 to Bt27,421 million in 2013. However, the adverse economy since last year cut the growth rate. The value of the portfolio increased to Bt28,224 million in 2014, and to Bt29,241 million at the end of June 2015, a 3.5% year-to-date rise.
THANI’s ratio of non-performing loans (NPLs) to total loans fell almost every year from 2008 through 2012. The ratio dropped from 4.9% in 2008 to 2.3% as of December 2012. However, the ratio increased to 3.6% in 2013, and peaked to 5.2% in 2014, due to the current economic slowdown. In the first half of 2015, the ratio decreased to 4.9% due to loan write-offs, the sale of bad loans, and the restructuring of some loans.
THANI’s profitability improved significantly in 2012 and 2013. Net profit increased 133% to Bt477 million in 2012 and increased 58% to Bt754 million in 2013, when compared with the net profit of the prior year. The return on average assets (ROAA) was 3.2% in 2013, improving from 2.8% in 2012 and 1.9% in 2011. The improvement in profitability was due to an aggressive expansion, a lower cost of funds, plus the economies of scale THANI realized in terms of operating costs. THANI’s operating efficiency also improved, due to economies of scale and the support it received from TBANK. The ratio of operating expenses to total income halved, continuously decreasing to 10.7% in 2013 from 26.7% in 2009. However, the ratio rose to 12.8% in 2014 and 14.3% for the first half of 2015, mainly due to higher litigation expenses. In 2014, amidst the current economic slowdown, THANI had to set aside a huge loan loss of provision of Bt432 million. THANI reported a net profit of Bt704 million in 2014, down 4% from 2013. For the first half of 2015, net profit was Bt365 million, compared with the Bt368 million it earned in the same period last year. It is a challenge for the company to maintain its asset quality and profitability during the unfavorable economic environment. As an affiliate of TBANK, THANI now has adequate financial flexibility. At the end of June 2015, THANI borrowed some money from TBANK. THANI uses secured funding from TBANK to meet its liquidity needs.
THANI’s capital base has deteriorated due to the aggressive debt-funded expansion of its loan portfolio. The deterioration came despite improved operating performance since 2009 and rises in paid-up from recapitalizations. The ratio of shareholders’ equity to total assets sagged from 31.4% in 2007 to 13.4% in 2010 and 12.2% at the end of September 2011. A recapitalization in November 2011 strengthened the ratio to 17.2% at the end of 2011. THANI used more debt to fund the significant growth of its loan portfolio in 2012 and 2013. As a result, the ratio of shareholders’ equity to total assets dropped to 13.1% at the end of 2012. THANI paid a stock dividend in 2013, in an effort to increase its base of equity capital. However, the stock dividend was not enough to maintain the ratio of shareholders’ equity to total assets. The ratio dropped to 11.8% at the end of 2013 as the loan portfolio grew rapidly during the same period. In 2014, THANI paid another stock dividend but the loan portfolio grew at a slower rate. The ratio of shareholders’ equity to total assets increased to 13.9% in 2014 and 14.5% at the end of June 2015. Its capital base has gradually improved due to high profits and the stock dividends.
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