TRIS Rating affirms the company rating of Thanachart Bank PLC (TBANK) at “AA-” and affirms the ratings of the bank’s hybrid Tier 2 capital securities at “A”. The ratings reflect TBANK’s strong franchise in its core business in auto hire-purchase lending. The ratings also take into account the management and technical 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.
Our assessment of TBANK’s business position reflects its status as a mid-sized Thai commercial bank. Key subsidiaries comprise securities brokerage, fund management, leasing, distressed asset management, and non-life insurance businesses. TBANK’s total asset size was Bt964.2 billion at the end of the first half of 2017 (H1/2017), ranked 6th across Thai commercial banks. Market shares on loans and deposits were, respectively, 5.9% and 5.7%. TBANK’s key strength is in auto hire-purchase lending. At the end of 2016, TBANK and its other non-bank subsidiaries had a combined market share in hire-purchase loans of 21%, the largest among hire-purchase players, based on TRIS Rating’s database.
The bank’s ability to broaden sources of non-interest income is on par with the Thai commercial bank industry. During H1/2017, net interest income as a percentage of total revenue made up over 66%, compared with peers’ average of 62%. The lending business is largely retail-focused with sizable exposure in auto hire-purchases. At the end of H1/2017, around 68% of total loans were loans to retail clients, 20% to corporates, and 11% to SMEs. Auto hire-purchases and mortgage loans made up around 51% and 14% of the total loan portfolios, respectively. Net fees and service income including net insurance income was 18.9% of total revenue in H1/2017, comparable to peers’ average of 21%. For TBANK, this includes fee income from subsidiaries and credit-related fees from hire-purchases and credit cards.
We expect TBANK’s Basel-III compliant total capital ratio to be within a 19-20% range over the next few years, sufficient to support its business expansion over the medium term. Core Equity Tier-1 to total capital was 70.3% at the end of H1/2017. We expect the company to maintain its current pay-out ratios. Profitability is on par with the industry average. Return on average assets (ROAA) was 1.33% in 2016, compared with the industry average of 1.32%. Profitability has improved over the past few years, thanks to lower credit costs. Non-interest income has derived from relatively diversified fee-based businesses, including securities brokerage, fund management, and insurance.
TBANK has made continual progress in improving its risk management as reflected in improving trends in asset quality and loan-loss provisioning. Credit costs dropped from 1.5% in 2013 to 0.9% in 2016, whilst the industry average rose amid soft economic environments. Credit costs across Thai commercial banks averaged 1.4% in 2016. TBANK’s NPL ratio dropped, thanks to improved asset quality and write-offs and restructuring of delinquent loans. The figure dropped substantially from 4.3% to 2.3% between the end of 2014 and H1/2017. Special-mentioned loans as a percentage of total loans also dropped to 4.0% from 4.6% in the same period. Loan-loss provisioning has strengthened, as evidenced by the bank’s over-reserve position at 195% at the end of H1/2017, well above the industry average.
TBANK’s funding is adequate as a mid-sized bank. Deposits made up 71.7% of total funding including shareholders’ equity at the end of H1/2017, around the average of Thai commercial banks of 74%. However, a relatively high reliance on fixed deposits may indicate a price-sensitive deposit base. Current account-savings account (CASA), an indicator of stable low-cost funding, was at 43.5% of total deposits, below peers’ average of 61%. Loans-to-deposits including bills of exchange (B/Es) was 104% at the end of H1/2017, which was around peers’ average of 99%.
TBANK’s liquidity position is in line with the Thai banking industry. Liquid assets as a percentage of total assets and deposits were 25.2% and 36.4%, respectively, as of H1/2017, comparable to other Thai banks. About a quarter of the bank’s liquid assets were investments in securities. The majority of these were government, state enterprise, and private debt securities.
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Basel III-Compliant Hybrid Tier-II Capital Securities Rating
The “A” ratings for TBANK’s hybrid Tier-II capital securities reflect the subordination risk 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. These 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. These 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.
Rating Outlook
The “stable” outlook reflects our view that TBANK will maintain its strong business position in its core line of business in hire-purchase lending. TBANK’s credit profile could be negatively impacted if TBANK’s asset quality deteriorates or its profitability weakens significantly. Any positive rating action will depend on TBANK’s ability to substantially lift its business position through size of client base, product diversity in credit-related businesses, and funding capability.
Company Rating: AA- Issue Ratings: TBANK24DA: Bt13,000 million hybrid Tier 2 capital securities due 2024 A TBANK25NA: Bt7,000 million hybrid Tier 2 capital securities due 2025 A Rating Outlook: Stable
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