TRIS Rating has affirmed the company rating of TISCO Bank PLC (TISCOB) at “A”, and has affirmed the ratings of the bank’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 its strengthened base of capital funds. However, the ratings are constrained by the bank’s small market share in loans and deposits, its limited network, poorer loan quality, and its reliance on wholesale funding. In addition, the current slowdown in the Thai economy 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 criteria of the Bank of Thailand (BOT). 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 and decides to provide financial support to the bank, 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 a strong base of capital funds. The ratings could be downgraded if TISCOB’s profitability weakens substantially, caused by a drop in the quality of its loan portfolio. 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.
TISCOB is a core bank subsidiary of TISCO Financial Group PLC (TISCO) through a 99.99% ownership stake. TISCO was ranked tenth among 19 Thai commercial banks in terms of asset size at the end of 2015, with a 2.1% market share in loans and a 1.4% share in deposits. With its strategic focus on a niche market, auto loans are TISCOB’s largest loan portfolio, accounting for around 64% of its total loans. The expertise of its management team has enabled TISCOB to maintain its market position in auto hire-purchase lending. TISCOB was the fourth-largest of 16 auto loan providers in TRIS Rating’s database, with approximately 10% market share as of December 2014.
Amidst a slowing economy and sluggish domestic auto sales, TISCOB’s loan portfolio continued to contract. At the end of 2015, TISCOB’s loans and receivables totaled Bt234.8 billion, a 9.2% decrease from the prior year. TISCOB’s loan quality deteriorated further in 2015, as illustrated by a rise in the increased non-performing loans (NPLs) formation rate. The NPL formation rate rose in 2015 mainly because a large corporate loan became an NPL. As of December 2015, NPLs climbed to Bt6.9 billion, giving an NPL ratio (NPLs as a percentage of total loans) of 2.94%. In addition, since 2010, the excess reserves for loan losses have declined. At the end of 2015, TISCOB’s loan loss reserves, as a percentage of the BOT minimum requirement, were 125%, falling from 260% at the end of 2010. The ratio is now far below the industry average.
Despite its efforts to diversify across a wider range of industry segments, TISCOB still faces loan concentration risks because of its strategic focus on auto loans. In addition, TISCOB has a few very large borrowers. The bank’s asset quality and capital buffer may deteriorate should such loans become troubled loans.
TISCOB reported net income of Bt2.9 billion in 2015, down slightly by 6% year-on-year (y-o-y). The drop in performance was caused mainly by large amounts of provisions, set up following the increase in new NPLs. Net interest income increased slightly, as a result of a wider interest spread. The bank’s funding costs reduced following a drop in the market interest rate. However, TISCOB’s funding cost is still higher than the industry average. The relatively high funding cost and credit cost were mitigated by TISCOB’s efficient control of operating costs.
TISCOB has relied on wholesale funding, which tends to be a more volatile funding source than retail funding. At the end of 2015, TISCOB’s ratio of loans to deposits plus bills of exchange (B/E) rose to 148%, weaker than its peers. In addition, TISCOB might be exposed to unexpected risk in the stability of its deposit base as the cap on insured deposits will be reduced to Bt1 million per customer per bank in August 2016.
TISCOB’s capital base has strengthened after a recent addition of new capital funds. The bank’s regulatory capital is adequate to fund its expansion efforts over the next few years. As of December 2015, TISCOB reported a Tier 1 ratio and a total capital ratio (BIS ratio) of 13.98% and 18.01%, respectively, above the minimum requirements set by the BOT.
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