TRIS Rating affirms the company rating of TISCO Financial Group PLC (TISCO) at “A-” with “stable” outlook. The rating reflects TISCO’s creditworthiness as the holding company of TISCO Group whose main operating asset is TISCO Bank PLC (TISCOB) through a 99.99% equity stake. The rating is based on the stable stream of dividends it receives from TISCOB which has a strong market position in automobile hire-purchase lending. The rating also takes into consideration its diverse sources of income and strengthened capital base. These strengths, however, are constrained by TISCOB’s small market shares in loans and deposits, concentrated exposure in automobile hire-purchase (HP) loans, and reliance on wholesale funding.
KEY RATING CONSIDERATIONS
A financial institution non-operating financial holding company (NOHC)
TISCO’s company rating is one notch lower than that of its core bank subsidiary, TISCOB (“A”). This difference reflects the structural subordination of TISCO’s obligations to those of TISCOB, TISCO’s dependence on dividends from TISCOB, and the risk of regulatory barriers surrounding payment of dividends from TISCOB.
Diverse sources of income
TISCO has a relatively stable business profile based on its diverse business lines, comprising commercial banking, non-bank lending, securities brokerage and investment banking, and asset management.
The group ranked 8th among 11 listed Thai commercial banks based on consolidated asset size in 2017. Market share in loans was 2.2% and market share in deposits was 1.6%. The group’s net interest and dividend income was 62.9% and non-interest income was 37.1% of total revenue in 2017. Net fee and service income was 33.2% of total revenue, comprising mainly fees from bancassurance, securities brokerage, and fund management.
Acquired retail business from SCBT enhances business positions
TISCO acquired the retail banking business of Standard Chartered Bank (Thai) PLC (SCBT) in 2017. This entailed a transfer of Bt33.7 billion of loan assets and Bt14.6 billion of deposits to TISCOB and All-Ways Co., Ltd., a subsidiary of TISCO. Around Bt31.4 billion were retail loans comprising mortgages, home-equity, personal, and credit-card loans . The remaining Bt2.2 billion were loans to small and medium-sized enterprises (SMEs). The majority of deposits were retail current accounts and savings accounts (CASA).
The acquired business fits TISCO’s strategic push in retail banking, whilst gradually expanding its lending to other segments. An instant reach to a larger pool of mortgage and home-equity borrowers and depositors enhances the group’s competitive position in retail banking. TISCO expects to draw the new customer base to a range of banking and wealth management products.
A more diverse portfolio also helps lessen the group’s reliance on HP lending. At the end of 2017, HP loans accounted for 50.6% of total loans, down from 61.1% a year earlier. Lending to corporate and SMEs was, respectively, 20.1% and 6.0%. Housing loans accounted for 8.3% of total loans, up from 0.4% a year earlier. At the same time, TISCO continues to capitalise on its expertise in auto lending on high-growth car-pledged loans.
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Strong capital and earnings
TISCO has a strong capital position. The group’s Basel-III compliant core equity tier-1 ratio was 14.96%, accounting for 77% of total capital at the end of 2017. TRIS Rating views the capital position is sufficient to support business expansion in the next few years, given a dividend payout in the range of 50-60%.
TISCO’s earnings capacity is sufficient to withstand potential volatility across the business cycle. The group’s profitability has outperformed its Thai bank peers as indicated by the ratios of its return on average asset (ROAA) of 2.13% in 2017. Contribution from fee and service income was above the average of Thai commercial banks. On a risk-adjusted basis, the bank’s net interest margin (NIM) has been well above industry standards over recent years.
Asset quality improves
TISCO’s asset quality is on an improving trend. The group’s credit cost lowered to 1.3% in 2017 after its peak of 2.1% in 2015. TISCO continues to add to its excess reserves for loan losses to mitigate the provisioning risk from an IFRS9 implementation. The non-performing loan (NPL) coverage ratio improved significantly to 183.6% at the end of 2017 from a low 80.1% at the end of 2015.
Despite the addition of SCBT portfolios with higher NPL ratios, the group’s total NPL ratio continued on its downward trend. This was driven by a reduction of NPLs in HP and corporate lending. NPL ratio fell to 2.32% in 2017 from 3.22% in 2015, a respectable figure for Thai banks.
High reliance on wholesale funding
TISCO’s rating remains constrained by its weak funding profile. Small-sized Thai banks tend to have a relatively low proportion of sticky retail deposits and a high reliance on wholesale funding. A large share of borrowings reflects TISCO’s strategy towards more flexible funding sources.
Notwithstanding, an addition of new retail deposits from SCBT enhances the group’s funding. Deposits as a percentage of total funding rose to 70.7% at the end of 2017, from 67.3% the previous year. CASA to total deposits were also up from 35.9% to 37.8% in that period. The loan-to-deposit ratio was down to 139.4% from 145.4%, still well above the Thai bank average.
RATING OUTLOOK
The “stable” outlook reflects the expectation that the group will maintain its strong competitive position in retail banking and a strong capital and earnings position.
RATING SENSITIVITIES
The rating could be revised downward in the case of a sustained period of substantially weakened profitability and severe deterioration of asset quality. A rating upgrade will depend on TISCOB’s ability to sustainably gain market shares, significantly diversify its loan portfolio, and materially improve its funding capability.
COMPANY OVERVIEW
TISCO was established in 2008 as a holding company, replacing TISCOB as the parent company of the TISCO Group. The change took place after the holding company restructuring plan, under the consolidated supervision scheme, was approved by the Bank of Thailand (BOT) in November 2008. TISCO made a tender offer for 99.99% shares of TISCOB in exchange for its own newly-issued shares. The swap ratio was 1:1. TISCO commenced operations on 1 January 2009, with registered capital of Bt11 billion and paid-up capital of Bt7.2 billion. On 15 January 2009, TISCO was listed on the Stock Exchange of Thailand (SET) as TISCOB was simultaneously delisted from the SET. TISCO later acquired 99.99% shares of TISCOB and its subsidiaries (i.e., TISCO Securities Co., Ltd., (TSC), TISCO Asset Management Co., Ltd. (TISCOASSET), Hi-Way Co., Ltd. (Hi-Way), TISCO Leasing Co., Ltd. (TISCOL), and TISCO Information Technology Co., Ltd. (TISCOIT). As of December 2017, TISCO’s issued and paid-up capital was Bt8 billion.
TISCO Group has entered into an agreement to acquire the retail banking business of SCBT in 2016. Towards the end of 2017, the group completed the transfer. The transaction entailed transfers of loan assets and liabilities from SCBT’s retail banking operation to TISCOB and All-Ways. TISCOB is the core bank of the TISCO Group. TISCOB, formerly named “TISCO Finance PLC”, was established in 1969 as a finance company. TISCOB was listed on the SET in 1983. In October 2004, TISCOB received approval from the Ministry of Finance (MOF) to upgrade its status to a commercial bank. TISCOB commenced banking operations on 1 July 2005 and changed its name to “TISCO Bank PLC”.
TSC, formerly named “Thai Securities Co., Ltd.”, was founded in 1975 as a subsidiary of the TISCO Group. TSC provides securities brokerage and investment banking services. In March 2011, TISCO Investment Advisory Co., Ltd. (TISCOIA) was established. TISCOIA was later renamed Deutsche TISCO Investment Advisory (DTIA), after TSC partnered with Deutsche Bank in 2012. TSC holds a 51% stake in DTIA, while the remainder is owned by Deutsche Bank. DTIA was granted approval from the MOF and the Securities and Exchange Commission (SEC) to operate an investment advisory business.
TISCOASSET, a fund management subsidiary, was established in 1992. TISCOASSET offers a complete line of asset management services, including provident funds, private funds, and mutual funds.
In 2017, TISCO, its commercial banking operation, contributed more than 87% of TISCO’s total net interest income and non-interest income. The remaining portion of TISCO’s revenue came from its other subsidiaries and affiliates in securities brokerage and asset management businesses - TISCOASSET, TSC, and Hi-Way.
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