TRIS Rating has affirmed the company rating of Mega International Commercial Bank PLC (Mega ICBC) at “AA+” with “stable” outlok. The rating is enhanced from Mega ICBC’s stand-alone credit profile to reflect its status as a highly strategic member of Mega International Commercial Bank Co., Ltd. in Taiwan (Mega ICBC-Taiwan). The stand-alone rating is based on its very strong base of capital funds, adequate risk management system, and its competitive edge in lending to Taiwanese investors. However, the rating is constrained by the bank’s small market shares in loans and deposits, its limited domestic network, and its business concentration risk stemming from the loans it makes and the deposits it takes. Mega ICBC’s growth might be affected by the limited prospects for direct investment in Thailand by Taiwanese companies and the current slowdown in the Thai economy.
The “stable” rating outlook reflects the expectation that Mega ICBC will maintain its status as a highly strategic subsidiary of Mega ICBC-Taiwan, and continue to receive strong support from its parent bank.
The credit rating and/or outlook of Mega ICBC could be affected if the credit profile of Mega ICBC-Taiwan changes or if our view changes concerning the strategic importance of Mega ICBC to Mega ICBC-Taiwan.
Mega ICBC is a wholly-owned subsidiary of Mega ICBC-Taiwan. Mega ICBC-Taiwan holds the leading position in Taiwan’s foreign exchange market and the offshore banking segment. Mega ICBC-Taiwan is rated by Moody’s Investors Service at “A1”, and by Standard and Poor’s at “A”. Both rating agencies have issued a “stable” outlook for Mega ICBC-Taiwan.
Mega ICBC had operated as a foreign bank branch in Bangkok since 1947 and had upgraded its status to become a foreign bank subsidiary in 2005. The bank serves a niche market of Taiwan-based and Taiwan-affiliated clients operating in Thailand. Mega ICBC has leveraged its parent bank’s strong franchise and brand name to enhance its expansion efforts in the Thai commercial banking industry. The bank’s Taiwanese customer base is a direct result of the strong relationships between its parent bank and Taiwanese corporations that have investments or subsidiaries in Thailand. A back-up credit line from its parent bank enhances Mega ICBC’s financial flexibility.
Based on asset size at the end of 2015, Mega ICBC is almost the smallest bank in Thailand, with a 0.1% market share in loans and a 0.1% share in deposits. Mega ICBC’s scope of business is relatively narrow and its distribution channel is limited, compared with its domestic peers. Mega ICBC offers its financial products and services only through its headquarters and four domestic branches.
As the economy slowed, Mega ICBC’s loan portfolio contracted and the loan quality weakened. As of December 2015, loans and receivables totaled Bt15.1 billion, down by 9% from last year. The bank’s loan quality deteriorated, as reflected by an increase in the formation rate of non-performing loans (NPLs) in 2015. At the end of 2015, NPLs climbed to Bt308 million, compared with the amount of Bt172 million at the end of 2014. The NPL ratio (NPLs as a percentage of total loans) rose to 2.04%, but remained lower than the industry average. Despite the increase, NPLs are likely to be controllable and manageable. Mega ICBC’s buffer of excess reserves for loan losses has declined, but is still sufficient to cover any future deterioration in the value of its loan portfolio. At the end of 2015, loan loss reserves were 187% of the regulatory minimum requirement, compared with 239% as of December 2011. Despite the weakening, the bank’s ratio remained higher than the 2015 industry average of 162%.
Mega ICBC’s loan portfolio carries some credit concentration risk as the types of businesses it lends to and the geographical locations of its customers are not well-diversified. Furthermore, the bank has a large portion of loans to Taiwanese customers and has many large borrowers. The bank’s asset quality and capital buffer may deteriorate should such loans become troubled loans.
At the end of 2015, Mega ICBC’s funding structure comprised deposits (46% of total funding), shareholders’ equity (27%), and borrowings from the interbank and money markets (27%). Besides deposits, Mega ICBC has additional sources of funding, denominated in foreign currency, from its affiliated foreign financial institutions. The bank uses the foreign currency funds to match its foreign currency lending. Mega ICBC faces concentration risk on its deposits because its major depositors are the large Taiwanese corporations operating in Thailand. However, Mega ICBC would most likely receive financial support from its parent bank to mitigate any liquidity risk.
In 2015, Mega ICBC reported a net profit of Bt278 million, up by 18% year-on-year (y-o-y). Return on average assets (ROAA) was 1.42%, comparable with the industry average. Mega ICBC’s base of capital funds is very strong, as illustrated by a year-end total capital adequacy ratio of 26.42%. The bank’s capital ratio is far above the regulatory minimum requirement, and sufficient for future growth over the next few years.
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