TRIS Rating assigns the company rating of LH Financial Group PLC (LHFG) at “BBB+” with “positive” outlook. The rating reflects LHFG’s creditworthiness since it is the non-operating holding company of the LH Financial Group. The main operating asset of LHFG is Land and Houses Bank PLC (LH BANK), in which LHFG holds a 99.99% equity stake. The rating is based on the stable stream of dividends it receives from LH BANK. The “positive” outlook reflects LH BANK’s stronger capital position, future growth opportunities, and potential improvement in business profile, leveraging on the strategic alliance with CTBC Bank Co., Ltd. (CTBC Bank) from Taiwan. The rating also takes into consideration the strengthened capital base of LH BANK and the prospects for improved earnings. These strengths, however, are constrained by LH BANK’s modest franchise in loans and deposits, high concentration of corporate loans, and relatively weak funding position.
KEY RATING CONSIDERATIONS
A financial institution non-operating holding company (NOHC)
TRIS Rating’s assessment of LHFG reflects its status as a holding company of a financial services group. LHFG’s company rating is one notch lower than that of its core bank subsidiary, LH BANK (“A-”). The one notch difference reflects several key points, such as the structural subordination of LHFG’s obligations to those of LH BANK, and LHFG’s dependence on dividends from LH BANK. The difference also reflects some uncertainty after CTBC Bank became a major strategic partner. The entry of CTBC Bank may trigger regulatory barriers or changes in the payment of dividends from LH BANK to LHFG.
LHFG’s subsidiaries comprise LH BANK (“A-/Positive), Land and Houses Fund Management Co., Ltd. (LH Fund), Land and Houses Securities Co., Ltd. (LH Securities) and Land and Houses Advisory Co., Ltd. (LH Advisory). LHFG’s consolidated assets reached Bt233bn at the end of 2017. LHFG’s financial position reflects almost entirely that of LH BANK since LH BANK’s assets make up 98.8% of LHFG’s assets.
Strengthened board and management
With CTBC Bank as a partnership, LHFG will have stronger board and management structure. The current board of directors has nine members, three of which are representatives of CTBC Bank. LHFG will welcome two more members from CTBC Bank to the board. LH BANK’s organization structure is strengthened by the addition of a management team from CTBC Bank. The new management team oversees two new units: the Strategic Business Development unit, in charge of new product development such as trade finance and cash management, Taiwan Business Development, and the Wealth Management Business Planning unit.
Strong capital position
CTBC Bank injected Bt16,599 million in new equity capital in the third quarter of 2017 when it became a strategic partner. The equity injection strengthened LHFG’s capital base. LHFG’s core equity Tier-1 (CET1) and Tier-1 capital ratio rose to 19.30% at the end of 2017, from 11.16% at the end of June 2017. LHBANK’s dividend pay-out policy remains unchanged: not exceeding 40% of net profit.
Small banking franchise
LH BANK is the smallest listed Thai commercial banks. Total assets were Bt230 billion as of the end of 2017. LH BANK’s market shares in loans and deposits are modest at 1.3% and 1.2% in 2017, respectively. TRIS Rating expects the strategic partnership with CTBC Bank will yield benefits. For example, the client bases and product lines of LH Bank and LHFG’s other subsidiaries, including LH Securities and LH Fund will expand. Cross boarder business opportunities may also open up.
Strong banking asset quality
Corporate loans makes up a high percentage of LH Bank’s loan portfolio: 65% of total loans at the end of 2017. The result is high concentration risk. Despite this risk, asset quality has been strong. The reported gross NPL ratio was 1.88% at the end of 2017, thanks to a focus on high quality corporate borrowers. The bank’s loss experience is also better than the industry average. Credit cost averaged 0.6% over 2013-2017, with a value of 0.4% for 2017 alone. For comparison, the commercial bank average was 1.3%. Loan loss reserves to reported NPLs was at 104% in 2017, higher than the value of 80.3% in 2014 and 91.7% in 2015.
Funding support from LH BANK
LH BANK provides funding support to LHFG and LHFG’s subsidiaries in the form of credit facilities. LH BANK’s funding is weaker and more concentrated than other banks rated by TRIS Rating. LH and QH are among the major depositors of LH Bank. Nonetheless, the bank has expanded its deposit base considerably as of date. Current account and savings account (CASA) to total deposits improved to 53% of total deposits at the end of 2017, a level in line with the industry. The loan-to-deposit ratio, however, rose to 107% at the end of 2017, up from about 90% in the past. The rise was driven by strong growth in loans. The recent rise has made the ratio somewhat above peers’ average of 100% at the end of 2017. Loan to deposits, including B/Es, was 89% in 2017, up from 86% a year ago.
Adequate liquidity
LHFG’s liquidity is adequate. Liquid assets to total assets ratio was at 35% in 2017, compared with 39% for LH BANK. Liquidity Coverage Ratio (LCR) of LH BANK is above the regulatory requirements . However, the LCR is less than the average of 120% for smaller banks and 176% for all commercial banks, as reported by the Bank of Thailand.
RATING OUTLOOK
The “positive” outlook is in line with LH BANK’s rating outlook. The “positive” outlook reflects our expectation that with the business support and capital support from its strategic partner, CTBC Bank, LH Bank will be able to expand its client base, increase contribution of fees and service income, and/or lower concentration in its loans and deposits.
RATING SENSITIVITIES
The rating upgrade hinges on the success of LH BANK’s effort to expand. If successful, the customer base will be more diversified, as well as loans and deposits. Net fees and service income, as a percentage of total revenue, will also move closer to the peers’ average. LH BANK must accomplish all these without sacrificing the quality of its assets, capital base, and profitability.
COMPANY OVERVIEW
LHFG was established on 22 April 2009 as a non-operating holding company under the Bank of Thailand’s consolidated supervision principle. LH BANK was set up as the subsidiary under the solo consolidation group, while LH Fund LH Fund was a subsidiary outside the solo consolidation group. After a restructuring, the shareholders of LH BANK became the shareholders of LHFG and LHFG holds 99.99% of paid-up shares of LH BANK. LHFG acquired a 99.80% stake in CIMB International (Thailand) PCL and a 99.99% stake in CIMB Advisory (Thailand) Co., Ltd. from CIMB International. The two companies were renamed Land and Houses Securities PCL (LH Securities) and Land and Houses Advisory Co., Ltd. (LH Advisory). On 1 March 2016, LHFG also acquired a 99.99% stake in LH Fund from LH BANK as part of a group restructuring.
On 27 July 2017, CTBC Bank, a banking subsidiary of CTBC Financial Holding Co., Ltd. (CTBC FHC) in Taiwan, acquired 35.6% of LHFG. The combined shareholding of Land and Houses PLC (LH) and Quality Houses PLC (QH) in LHFG therefore was reduced to 35.6%. Other key subsidiaries under CTBC FHC include life insurance, securities, venture capital, and asset management. CTBC Bank is well-positioned in wealth management and credit card services, and is well-established in corporate banking, offering products like trade finance, treasury services, transaction banking, and offshore finances. CTBC Bank is rated “A/Stable” by S&P Global Ratings and “A2/Stable” by Moody’s Investors Service (Moody’s).
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