TRIS Rating affirms the company rating and the ratings of senior unsecured debentures up to Bt70,000 million due within 2021 of TISCO Bank PLC (TISCOB) at “A” with “stable” outlook. The ratings reflect TISCOB’s strong competitive position in automobile hire-purchase (HP) lending and its strong capital and earnings position. However, the ratings are constrained by the bank’s small market shares in loans and deposits, concentrated loan exposure in the automobile HP loan segment, and reliance on wholesale funding.
KEY RATING CONSIDERATIONS
A core banking of TISCO Financial Group
TISCOB is a 99.99% owned core banking of TISCO Financial Group PLC (TISCO). TISCOB was ranked 8th among 11 listed Thai commercial banks in terms of asset size at the end of 2017, with a 2.1% market share in loans and a 1.6% share in deposits. Net interest and dividend income represented 74.1% of total revenue in 2017. A large portion of non-interest income comprised net fees and service income, at 21.7% of total revenue.
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, a subsidiary of TISCO. Around Bt31.4 billion were retail loans comprising mortgage, 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 bank’s reliance on HP lending. At the end of 2017, HP loans accounted for 50.6% of total loans, down from 60.6% a year earlier. Lending to corporate and SMEs was, respectively, 20.1% and 6.0%. Housing loans accounted for 8.5% 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.
Strong capital and earnings
TISCOB has a strong capital position. The bank’s Basel-III compliant core equity tier-1 ratio was 15.98%, accounting for 77% of the total capital at the end of 2017. TRIS Rating views the capital position is sufficient to support business expansion over the next few years, taken into account a dividend payout in the range of 50-60%.
The bank’s earning capacity is sufficient to withstand potential volatility across the business cycle. Profitability has been on the high side relative to Thai bank peers as indicated by its return on average assets (ROAA) of 1.6% in 2017. Contribution from fee and service income was comparable to the average of other Thai banks. On a risk-adjusted basis, the bank’s net interest margin (NIM) has been well above industry standards over recent years.
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Asset quality improves
TISCOB’s asset quality is on an improving trend. The bank’s credit cost lowered to 1.2% in 2017 after peaking at 2.0% in 2015. The bank continues to add to its excess reserves for loan losses to mitigate the provisioning risk due to IFRS9 implementation. The non-performing loan (NPL) coverage ratio improved significantly to 201.9% at the end of 2017 from a low 80.7% at the end of 2015.
Despite the addition of SCBT portfolios with higher NPL ratios, the bank’s NPL ratio continued its downward trend. This was driven by a reduction in NPLs among HP and corporate lending. The NPL ratio fell from 2.9% in 2015 to 2.2% in 2017, a respectable figure for Thai banks.
High reliance on wholesale funding
TISCOB’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 the bank’s strategy towards more flexible funding sources.
Notwithstanding, an addition of new retail deposits from SCBT enhances its funding. Deposits as a percentage of total funding rose to 72.9% at the end of 2017, from 69.2% the previous year. CASA to total deposits were also up from 35.7% to 37.7% in that period. A loan-to-deposit ratio was down to 135.3% in 2017 from 142.3% in the previous year was also well above the Thai banks’ average.
RATING OUTLOOK
The “stable” outlook reflects the expectation that TISCOB will maintain its strong competitive position in retail banking and a strong capital and earnings position.
RATING SENSITIVITIES
The ratings 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 the bank’s ability to sustainably gain market shares, significantly diversify its loan portfolio, and improve its funding capability.
COMPANY OVERVIEW
TISCOB, formerly named “TISCO Finance PLC”, was established in 1969 as a finance company owned by Bankers Trust New York Corporation (60% holding), Bancom Development Corporation (20%), and Kasikorn Bank PLC (20%). TISCOB was listed on the Stock Exchange of Thailand (SET) in 1983. In the aftermath of the 1997 financial crisis, TISCO Finance entered into the Tier 1 capital support scheme offered by the Ministry of Finance (MOF) in 1999. As a result, the MOF became a major shareholder with a 42.84% stake in TISCO Finance. The MOF’s shareholding in TISCO Finance was later reduced to 0.05%. In October 2004, TISCO Finance received approval from the MOF to upgrade its status to a commercial bank. TISCO Finance commenced its banking operations on 1 July 2005, and changed its name to “TISCO Bank PLC”.
In accordance with the consolidated supervision regulatory framework of the Bank of Thailand (BOT), in November 2008 the restructuring plan of TISCOB’s holding company was approved by the MOF. TISCO was established in 2008 as a holding company and the parent company of TISCO Group in place of TISCOB. On 15 January 2009, TISCO was listed on the SET in place of TISCOB 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)). The TISCO Group now offers all major types of financial services including banking, HP lending, securities brokerage, and asset management.
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