TRIS Rating has affirmed the company rating of Thanachart Bank PLC (TBANK) at “AA-”, and has affirmed the ratings of the bank’s subordinated debentures and hybrid Tier 2 capital securities at “A+” and “A”, respectively. The outlook remains “stable”. The ratings reflect TBANK’s strong franchise in its core line of business, auto hire-purchase lending. The ratings also take into account the support TBANK receives from its Canadian strategic partner, Bank of Nova Scotia (BNS), which holds a 49% stake in TBANK through Scotia Netherlands Holdings B.V. The ratings, however, are constrained by TBANK’s relatively low profitability and weak but improving asset quality. The current slowdown of the Thai economy and sluggish domestic auto sales remain the major factors which may limit TBANK’s growth and profitability.
The “A” ratings for TBANK’s hybrid Tier 2 capital securities reflect 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 the securities are qualified as Tier 2 capital under the Bank of Thailand (BOT)’s criteria.
The hybrid Tier 2 capital securities (TBANK24DA) are subordinated, unsecured, non-deferrable, and convertible. The securities are also callable by TBANK 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 TBANK’s depositors and holders of TBANK’s senior unsecured debentures. The principal of the securities can be converted into common shares in the event that the regulator deems the bank to be non-viable and decides to provide financial support to the bank, in accordance with the non-viability clause.
The hybrid Tier 2 capital securities (TBANK25NA) are subordinated, unsecured, non-deferrable, and non-convertible. The securities are also callable by TBANK 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 TBANK’s depositors and holders of TBANK’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 and decides to provide financial support to the bank, in accordance with the non-viability clause.
The “stable” outlook reflects the expectation that TBANK will maintain its strong competitive position in its core line of business. The outlook is also based on the expectation that TBANK’s loan quality will stay under control, and not deteriorate significantly.
TBANK’s credit profile could be negatively impacted if TBANK's profitability declines substantially as its loan portfolio shrinks and its credit costs rise. Any credit rating upside is unlikely in the near term because of the limited prospects for auto loan segment and the current slowdown in the Thai economy.
TBANK, a core subsidiary of Thanachart Capital PLC (TCAP) by virtue of TCAP’s 50.96% shareholding, is the sixth-largest Thai commercial bank as measured by asset size. At the end of June 2015, TBANK’s market shares in loans and deposits declined to 6.5% and 5.9%, respectively, down from 8.7% and 7.7% in 2010. TBANK is the largest auto loan provider in Thailand, with approximately 22% market share in auto loans as of December 2014. After acquiring Siam City Bank PLC (SCIB), TBANK’s loan portfolio is now more diversified across a greater number of industry sectors. The bank’s loan portfolio comprised retail loans (67% of total loans), and corporate loans plus small and medium-sized enterprise (SME) loans (33%) as of June 2015.
TBANK’s loan portfolio has contracted, as the result of the slowdown in the Thai economy and sluggish domestic auto sales. At the end of June 2015, TBANK’s loans and receivables totaled Bt718.6 billion, down by 5% from December 2014. Since 2014, TBANK’s auto loans, accounting for 53% of total loans, have declined steadily after the first-time car buyer subsidy scheme, implemented by the previous government, was terminated. Auto loans decreased by 9% in 2014, and dropped by 5% during the first half of 2015. To offset the drop in auto loans, TBANK plans to expand in other segments, particularly the SME segment.
TBANK’s credit profile has been constrained by a high level of non-performing loans (NPLs). The high level is, in part, a legacy of the acquisition of SCIB’s commercial loan portfolio. However, TBANK has boosted the quality of the portfolio by restructuring, writing-off, and selling its NPLs. In addition, TBANK grants new loans more prudently to prevent any further deterioration in its credit quality. As of June 2015, the bank’s NPLs declined to Bt28.4 billion, down from Bt36.9 billion at the end of 2010. The ratio of NPLs to total loans (NPL ratio) was 3.9% as of June 2015, compared with 6.1% in 2010. However, the NPL formation rate may remain high as there is no recovery in sight for the Thai economy. To strengthen its buffer against loan losses, TBANK has continually added to its excess reserves for loan losses. As of June 2015, the bank’s loan losses reserves, as a percentage of the BOT minimum required reserves, was 150%. Though above the required minimum, TBANK’s reserves are still below the industry average.
In 2014, TBANK delivered a net profit of Bt10.2 billion, down 35% year-on-year (y-o-y). However, TBANK’s 2013 results included two extraordinary items: a one-time gain from divesting its life insurance subsidiary, and extra loan loss provisions. If these two extraordinary items are excluded, net profit in 2014 was nearly unchanged from 2013. For the first half of 2015, TBANK’s net profit was Bt5.4 billion, up by 8% y-o-y. TBANK’s profitability is lower than its peers. The bank’s return on average assets (ROAA) was 1.0% in 2014 and 0.6% (non-annualized) for the first half of 2015, below the industry averages. Due to the unfavorable economic conditions at present, TBANK’s profitability may fall further as its loan portfolio shrinks or its cost of credit rises as the quality of the loan portfolio deteriorates.
TBANK’s regulatory capital base has improved and is adequate to support its growth plans for the next few years. As of June 2015, the Tier 1 capital ratio and the total capital ratio were 11.35% and 17.19%, respectively, well above the minimum requirements of 6.00% and 8.50% as set by the BOT. TBANK’s total capital ratio is comparable with the industry average but its Tier 1 capital ratio remains lower than the industry average.
Company Rating: AA- Issue Ratings: TBANK227A: Bt8,497 million subordinated debentures due 2022 A+ TBANK22OA: Bt4,018.5 million subordinated debentures due 2022 A+ TBANK24DA: Bt13,000 million hybrid Tier 2 capital securities due 2024 A TBANK25NA: Bt7,000 million hybrid Tier 2 capital securities due 2025 A Rating Outlook: Stable
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