TRIS Rating has assigned a “AA-” rating to the proposed issue of up to Bt3,000 million in senior unsecured debentures of Secondary Mortgage Corporation (SMC). At the same time, TRIS Rating has affirmed the company rating and the senior unsecured debenture ratings of SMC at “AA-”. The outlook remains “stable”. The proceeds from the new debentures will be used to refinance existing debentures maturing in June and August 2016, to acquire mortgage loans, and to fund SMC’s operations.
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 prospects due to the 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, to maintain a sufficient capital base, and to improve operating efficiency after a recent sizable expansion.
The “stable” outlook reflects the expectation that SMC’s management team will improve operating efficiency and able to control asset quality. The outlook is also based on 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 improve its profitability continuously, control asset quality efficiently, and maintain capital base sufficiently. In contrast, the case for a downward revision could be considered, should SMC’s financial profile deteriorate significantly.
SMC was established in 1997 under the Emergency Decree on the Secondary Mortgage Finance Corporation Act B.E. 2540 (the SMC Act), with a mission to promote the Thai secondary mortgage market. SMC, a specialized financial institution (SFI), is wholly owned by the Ministry of Finance (MOF). Under the SMC Act, SMC has a competitive advantage by virtue of the special legal and regulatory support it receives, plus the tax privileges granted to SMC.
SMC was set up to develop 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 other financial institutions, which provide mortgage financing services in the primary market. SMC buys the mortgages, pools the mortgage loans as collateral for mortgage-backed securities (MBS), then issues and sells the securities to investors. From 2002 until at the end of 2015, SMC issued eight tranches of MBS and asset-backed securities (ABS), worth in total approximately Bt11.6 billion. The issuances increased the number and type of alternative securities available to investors.
SMC’s loan portfolio has expanded substantially over the past few years. SMC has entered 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). At the end of 2015, SMC’s loans and receivables totaled Bt24.2 billion, a 50% increase from the prior year.
As the economy slowed, SMC’s loan quality has deteriorated, as reflected by an increase in non-performing loans (NPLs). At the end of 2015, NPLs rose to Bt724 million, compared with Bt387 million as of December 2014. NPL ratio (NPLs as a percentage of total loans) increased to 2.99% as of December 2015, but the ratio was still below the industry average. Despite the increase, NPLs are expected to be manageable and controllable.
SMC’s financial performance improved over 2011-2014, but declined slightly in 2015. SMC reported a net profit of Bt67 million in 2015, down by 5% year-on-year (y-o-y). Return on average assets (ROAA) was 0.32% in 2015, compared with 0.54% in 2014. The drop in performance was caused mainly by large provisions for bad debts. Apart from the provisions needed for new NPLs, SMC added its excess reserves so as to strengthen its cushion for loan losses.
SMC is now more reliant on long-term funding since it recently issued new senior unsecured debentures and MBS. Both of these securities carry long maturities and help reduce the mismatch between the duration of its assets and the duration of its liabilities.
SMC’s regulatory capital ratio (BIS ratio) has weakened, as it has expanded substantially over the past few years. SMC’s BIS ratio fell continually from 33.27% in 2012 to 10.11% in 2015. Despite the decline, the ratio remained above the regulatory minimum requirements.
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