TRIS Rating has affirmed the company rating and the senior unsecured debenture ratings of Secondary Mortgage Corporation (SMC) at “AA-” with “stable” outlook. The ratings reflect the continual improvement in SMC’s stand-alone business profile and the strong support SMC receives from the government. SMC’s stand-alone rating reflects its good business prospects due to its successful cooperative efforts with several leading commercial banks. However, the stand-alone rating is constrained by SMC’s ability to control the quality of its assets, maintain a sufficient capital base, and improve its operating efficiency after it underwent a sizable expansion.
The “stable” outlook reflects the medium-term expectation that SMC’s management team will improve operating efficiency and control asset quality. The outlook is also based on the expectation that SMC can increase the size of its portfolio as planned by acquiring loans from allied financial institutions. The outlook also reflects the expectation that SMC’s relations with the government and related state entities, along with the business and financial support it receives from the government, will remain unchanged in the future.
The rating and/or outlook for SMC could be revised upward if SMC can continuously improve its profitability, efficiently control asset quality, and maintain a sufficient capital base. In contrast, the case for a downward revision could be considered, should SMC’s financial profile deteriorate significantly.
SMC is a special financial institution (SFI) and is 100% owned by the Ministry of Finance (MOF), with a mission to promote the Thai secondary mortgage market. SMC has a competitive advantage by virtue of the special legal and regulatory support it receives, plus the tax privileges granted to SMC under the Emergency Decree on the Secondary Mortgage Finance Corporation Act B.E. 2540 (the SMC Act). The government also showed its support by injecting funds into SMC during the 2014 budget year.
SMC was incorporated in 1997, under the SMC Act, with initial capital of Bt1,000 million. Under the Act, the government can guarantee the debt issued by SMC. However, the guarantee cannot exceed 4 times SMC’s capital. In January 2009, the MOF injected Bt100 million of new equity capital into SMC. In August 2014, the MOF injected an addition Bt130 million of new equity capital.
SMC’s board of directors comprises representatives from the private sector and from various governmental entities, including the Fiscal Policy Office, the Bank of Thailand (BOT), the Securities and Exchange Commission (SEC), Government Housing Bank (GHB), and the Land Department, together with no more than four qualified directors plus SMC’s managing director (MD). The composition of its board has been carefully designed to support its mission.
SMC was established to create a secondary mortgage market and make long-term fixed rate mortgage loans available to home owners. SMC’s existing loan portfolio comprises mortgage loans acquired from financial institutions. The financial institutions provide mortgage financing services in the primary market. SMC buys the mortgages, pools the mortgage loans as collateral for mortgage-backed securities, then issues and sells the securities to investors.
SMC has good growth prospects, even after it fulfilled many of its strategic objectives. Its loan portfolio in 2014 has almost doubled in value since the end of 2013. SMC has been profitable for eight years, despite having volatile earnings. SMC has inked cooperative agreements with many financial institutions such as Kasikorn Bank PLC (KBANK), Siam Commercial Bank PLC (SCB), Tisco Bank PLC (TISCO), and Kiatnakin Bank PLC (KK). Each of these financial institutions agreed to sell more loans to SMC. During 2009 to 2014, SMC allied with some financial institutions to originate new mortgage loans worth a total of Bt16,805 million. As a result, the value of SMC’s loan portfolio significantly increased. The value rose from Bt1,732 million in 2011 to Bt8,610 million in 2013. In 2014, SMC’s loan portfolio jumped by 88% from the value at the end of 2013, climbing to Bt16,191 million. As of June 2015, its loan portfolio stood at Bt16,977 million. The loan portfolio comprises mortgages purchased from KBANK (around 50%), SCB (around 30%), and TISCO and KK (around 10% each).
After resolving asset quality problem, the ratio of non-performing loans (NPL) to total loans significantly dropped. The ratio fell from around 40% in 2006 to 5.5% in 2012. The NPL to total loan ratio fell to 3.3% in 2013 and 2.4% in 2014 as the portfolio expanded. As of June 2015, SMC’s NPL to total loan ratio of 3.3% was lower than the average NPL level of 3.6% for all 15 commercial banks. The low
NPL to total loan ratio was due to the fact that almost all of the loan portfolio comprise mortgages purchased from big banks. The quality of the mortgages was better than loans originated from a small bank or an SFI. However, SMC has yet to prove its ability to control the quality of the newly acquired loans.
SMC’s profitability has improved since 2008. SMC reported a Bt22 million net profit in 2008 after three consecutive yearly losses, and then reported a Bt26 million net profit in 2009. In 2010, net profit was only Bt0.3 million, due to a decline in operating income and an increase in the allowance for bad debts and doubtful accounts. The increase in the allowance was required in order to bring SMC into compliance with International Accounting Standard 39 (IAS39). In 2011, net profit recovered to Bt4 million, and increased to Bt10 million in 2012 as the loan portfolio grew and the expenses for bad debts and doubtful accounts fell significantly. Net profit rose to Bt26 million in 2013 and Bt69 million in 2014. In the first half of 2015, net profit rose to Bt43 million as SMC started reaping the benefits of a sizable loan portfolio.
In the past, SMC’s core funding base depended on short-term promissory notes. SMC recently issued senior unsecured debentures and mortgage-backed securities (MBS). The debentures helped reduce the portion of funding from short-term promissory notes from 80% of SMC’s total funding in 2012 to 40% of its total funding as of June 2015. For the remaining 60% of its total funding, SMC reduced the mismatch in the duration of its loan portfolio by issuing senior unsecured debentures and issuing MBS. Both of these types of securities carry long maturities and are a good source for long-term funding.
SMC is fulfilling its mission to develop the secondary mortgage market. From 2002 until at the end of June 2015, SMC has issued seven tranches of MBS and asset-backed securities (ABS), worth in total Bt6,612 million. The issuances increased the number and type of alternative securities, such as MBS, available to investors.
SMC has utilized its capital base effectively as it expanded. The BIS ratio declined from 77.7% in 2011 to 13.6% as of June 2015. The ratio of shareholders’ equity to total assets also decreased, sliding from 36.3% in 2011 to 5.4% as of June 2015. TRIS Rating expects SMC will maintain sufficient capital to absorb any future losses from any adverse changes in the industry.
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