TRIS Rating has affirmed the company rating of Thanachart Bank PLC (TBANK) at “AA-” and has affirmed the ratings of the bank’s subordinated debentures and hybrid Tier 2 capital securities at “A+” and “A”, respectively. The outlook remains “stable”. The ratings reflect TBANK’s strong franchise in its core line of business, auto hire-purchase lending. The ratings also take into account the support TBANK receives from its Canadian strategic partner, Bank of Nova Scotia (BNS), which holds a 49% stake in TBANK through Scotia Netherlands Holdings B.V. The current slowdown of the Thai economy and sluggish domestic auto sales remain the major factors which may limit TBANK’s growth and profitability.
The “A” ratings for TBANK’s hybrid Tier-II capital securities reflect the subordination risk of the securities and the non-payment risk of the securities, as defined by the non-viability loss absorption clause. The features of the securities comply with the BASEL III guidelines and the securities are qualified as Tier-II capital under the Bank of Thailand’s (BOT) criteria.
The hybrid Tier-II capital securities (TBANK24DA) are subordinated, unsecured, non-deferrable, and convertible. The securities are also callable by TBANK 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 TBANK’s depositors and holders of TBANK’s senior unsecured debentures. The principal of the securities can be converted into common shares 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 hybrid Tier-II capital securities (TBANK25NA) are subordinated, unsecured, non-deferrable, and non-convertible. The securities are also callable by TBANK 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 TBANK’s depositors and holders of TBANK’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 our view that TBANK will maintain its strong competitive position in its core line of business. The outlook is also based on the expectation that TBANK’s loan quality will stay stable.
TBANK’s credit profile could be negatively impacted if TBANK's business position and asset quality deteriorates significantly. Any credit rating upside is unlikely in the near term. However, positive rating actions depend on TBANK’s ability to diversify its business and loan portfolios, and materially improve its cost efficiency.
TBANK remains the largest auto loan provider in Thailand, with an approximately 19% market share in auto loans as of December 2015. The auto hire-purchase lending remains the dominant loan segment for the bank, contributing half of the total loan portfolios. Housing loans show a 12.6% year-on-year (y-o-y) growth between June 2015 and June 2016, making up 13.8% of the total loan portfolios. The composition of loans by segments remains largely unchanged between June 2015 and June 2016 with the retail segment representing two-thirds of the total loan and the corporate and SME segment combined representing one-third of the total.
TBANK’s loan portfolio has contracted, as a result of the slowdown in the Thai economy and sluggish domestic auto sales. At the end of June 2016, TBANK’s loans and receivables totaled Bt688 billion, down by 4.3% from December 2015. Since 2014, the negative growth in TBANK’s auto loans has been consistent with an overall trend among the auto loan providers, as a result of weak car sales and weak economies. However, given the recoveries in certain aspects in the auto hire purchases, TRIS Rating expects a mild pick-up for TBANK’s loan portfolio in this segment next year.
TBANK’s business position is stabilising with an improving trend. The bank had previously been constrained by a high level of non-performing loans (NPLs) that was, in part, a legacy of the acquisition of Siam City Bank PLC’s (SCIB) commercial loan portfolio. However, TBANK has boosted the quality of the portfolio by restructuring, writing-off, and selling its NPLs. Having adopted the new Loan Origination System and the uses of analytics, the bank is able to underwrite loans more prudently, preventing any further deterioration in its credit quality. As of June 2016, the bank’s NPLs declined to Bt18.6 billion, down from Bt28.4 billion in June 2015. The ratio of NPLs to total loans (NPL ratio) was 2.7% as of June 2016, compared with 3.95% in June 2015. The NPL formation rate is relatively low, reflecting the bank’s stronger asset quality. To strengthen its buffer against loan losses, TBANK has continually added to its excess reserves for loan losses. As of June 2016, the bank’s NPL coverage ratio excluding allowance for revaluation of restructured debt increased to 117.9%, a significant improvement from 92.3% at the end of June 2015.
TBANK continued strengthening its capital position with its Tier-I capital ratio, reaching 12.9%, which was above those of its mid-sized bank peers, and its Tier-I plus Tier-II capital ratio of 18.84%, the highest in the industry at the end of June 2016. The bank’s pre-provision income of Bt19,917 million for 2015 and Bt9,744 million for the first half of 2016 provided ample buffer for loan losses.
Despite the improvements in these areas, TBANK’s credit profile has been constrained by its business position as a mid-sized bank, which lacks the strength in broad-based sticky retail funding and diversified client bases that the large banks have. Although the bank has achieved significant improvements in raising the proportion of its current account-savings account (CASA) funding, the key indicator of stable retail funding, and lowering its loan-to-deposit ratio, there is still a big gap between its current funding capability and those of the large banks. TBANK’s funding cost has consistently been at the higher end among peers which may constrain its ability to expand into highly competitive segments. Its expense-to-income ratio has also been consistently on the high side compared with peers.
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