TRIS Rating has affirmed the company rating of Land and Houses Bank PLC (LH BANK) at “A-” and has affirmed the rating of LH BANK’s hybrid Tier 2 capital securities at “BBB” with “positive” CreditAlert. The company rating reflects LH BANK’s continual improvements in its business and financial profiles. The ratings also take into consideration LH BANK’s successful efforts to broaden and diversify its loan portfolio across a wider range of sectors, the relatively steady performance of its loan portfolio despite a recent rise in credit cost deterioration related to its exposure to the SME segment, as well as the support LH BANK receives from the major shareholders of LH Financial Group PLC (LHFG), its whole owner. However, the ratings are constrained by the bank’s relatively small market shares in loans and deposits, its reliance on large borrowers, its dependence on interest revenues, and the strain on the Thai credit market amid the prolonged economic slowdown.
The “BBB” rating for LH BANK’s hybrid Tier 2 capital securities (LHBANK255A) 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 BOT’s criteria. The securities are subordinated, unsecured, non-deferrable, and non-convertible. The securities are also callable by LH BANK 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 LH BANK’s depositors and holders of LH BANK’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, in accordance with the non-viability clause.
TRIS Rating placed the company rating of LH BANK on CreditAlert with a “positive” implication on 1 April 2016, in relation to the announcement by LHFG on 29 March 2016 of its entry into a memorandum of understanding in relation to a share subscription agreement (SSA MOU) with CTBC Bank Co., Ltd. (CTBC) for a potential strategic investment by CTBC in LH Bank. The “positive” CreditAlert reflects TRIS Rating’s view of potential positive impact on LH Bank’s credit profile from the strengthening of capital base and future growth opportunities. As updated by LH Bank’s management, the transaction is still awaiting regulatory approvals. TRIS Rating, therefore, maintains the CreditAlert and will reassess LH Bank’s credit profile after the transaction is completed.
CTBC, a Taiwanese bank, is one of the leading banks in Taiwan. CTBC holds solid market presences in corporate and retail banking. If the transaction succeeds, CTBC will become the largest individual shareholder of LHFG, with a 35.6% stake. The combined stake of the existing major shareholders (comprising Land & Houses PLC and Quality Houses PLC) will fall to 35.6%. LHFG’s equity capital funds will increase to approximately Bt16 billion after the private placement. The capital base of LH BANK will increase by the same amount once LHFG injects the new funds into LH BANK. With the new capital funds, as well as the expertise from the new strategic partner, LH BANK can enhance its ability to expand in the future.
LH BANK is a core and wholly-owned subsidiary of LHFG, the non-operating holding company of the LH BANK Group. As of September 2016, LH BANK was ranked 13th among 17 Thai commercial banks in terms of asset size, with a 1.3% market share in loans and a 1.3% share in deposits. LH BANK has recently added many micro branches, to strengthen its banking channel.
LH BANK’s loan portfolio has expanded rapidly, rising at a compound annual growth rate of 25% from 2010 to 2015. As of September 2016, loans and receivables reached Bt141.6 billion, up by 8% from September 2015. The growth came largely from increases in corporate lending. After becoming a universal bank, LH BANK has focused more on corporate loans. However, accumulating large corporate borrowers has also resulted in a relatively high concentration risk.
Compared with the industry, LH Bank has relatively low credit costs and non-performing loan (NPL) ratio. Its credit cost ratio to average loans for the first nine months of 2016 was at 0.59% compared with the industry average of 1.12% for the same period. The NPL ratio to total loans (excluding interbank loans) was at 1.8%, below the industry average of 3.7% as of September 2016. The low NPL ratio was partly attributed to bad debt write-offs and disposal. Nevertheless, LH Bank has held up well with respect to its overall loan asset quality compared with the industry norm. That is due largely to its proportionately low exposure to the SME segment which has been the most problematic sector with respect to loan delinquency. To enlarge its cushion of reserves, LH BANK added substantial excess reserves for loan losses. As of September 2016, the bank’s loan loss reserves accounted for 195% of the level of reserves required by banking regulations, up from 164% as of December 2014.
In 2015, LH BANK reported a net profit of Bt1.7 billion, rising by 35% year-on-year (y-o-y). Net income for the first nine months of 2016 rose by 54% y-o-y. The improvement in net profit is largely driven by increases in both net interest income and non-interest income. Net interest income rose as the loan portfolio grew, while non-interest income increased from gains on the sales of investments. Compared with other commercial banks, the gains on the sales of investments comprised a much larger portion of LH BANK’s profit, potentially making LH BANK’s financial performance more volatile relative to its peers. LH BANK’s profitability is relatively low compared with its peers. Its return on average assets (ROAA) remains below the industry average. This is explained by its relatively high funding cost and its strategic focus on corporate segment which provides lower yields compared with the retail segment. LHBANK has made progress in attracting deposits, albeit relatively high costs. The proportion of generally low-cost current account and savings account deposits (CASA) represents only a small percentage of its overall funding structure.
Despite the recent impressive growth in net profit, LH BANK’s financial leverage has increased continually over the past few years, elevated by the rapid expansion of its loan portfolio. As of September 2016, LH BANK reported a Tier 1 capital ratio of 10.58% and a total capital ratio (BIS ratio) of 14.13%. Both measures are above the minimum requirements set by the Bank of Thailand (BOT), but well below the industry averages. TRIS Rating views that a significant capital increase, either through the potential strategic investment from CTBC or from its existing shareholders, is necessary to support its business growth and keep its capitalization in line with the industry.
Land and Houses Bank PLC (LH BANK)
Company Rating: A-
Issue Rating:
LHBANK255A: Bt4,000 million hybrid Tier 2 capital securities due 2025 BBB
CreditAlert Designation: Positive