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 current senior unsecured debenture ratings of SMC at “AA-”. The outlook remains “stable”. The proceeds from the new debentures will be used to refinance the maturing promissory notes in order to reduce the mismatch of maturity in assets and liabilities 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 over view that SMC’s management team will be able to steady its operating performance. Despite the sharp increase of credit cost, SMC has significantly raised its earnings buffer from the jump in pre-provisioning income. 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 consistently and control its asset quality, and maintain an adequate capital base. 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 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. However, as of 31 March 2016, its loans and receivables slightly decreased to Bt 23.9 billion as a result of loan repayments and prepayments and no new loans acquired during this period.
Due to the economic slowdown, 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 to Bt387 million as of December 2014. NPL ratio (NPLs as a percentage of total loans) increased to 2.99% as of December 2015. The ratio further increased to 3.74% as of 31 March 2016. The deterioration of asset quality needs to be closely monitored.
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). In the first quarter of 2016, net profit was at Bt25 million, nearly the same- level of the same period last year. 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 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 that of its assets and the duration of its liabilities.
SMC’s regulatory capital ratio has further decreased, as it has expanded substantially over the past few years. SMC’s capital ratio fell continually from 33.27% in 2012 to 10.23% in the first quarter of 2016. Despite the decline, the ratio remained at a level close to the commercial banks regulatory requirement.
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