TRIS Rating affirms the company rating on TISCO Bank PLC (TISCOB) at “A” with “stable” outlook. At the same time, TRIS Rating assigns a rating of “A” to TISCOB’s proposed issuance limit of up to Bt100 billion in senior unsecured debentures due within 5 years under the Medium Term Notes Program (MTN). The proposed issuance limit of up Bt100 billion is an increase from the previous limit of up to Bt70 billion. The assigned issue rating replaces the rating of the issuance limit of up to Bt70 billion announced on 24 May 2016.
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.
TISCOB is a 99.99% owned core banking subsidiary of TISCO Financial Group PLC (TISCO). TISCOB was ranked 8th among 11 listed Thai commercial banks in terms of asset size, with a 2.1% market share in loans and a 1.5% share in deposits at the end of March 2018.
In TRIS Rating’s view, the acquisition of the retail banking business of Standard Chartered Bank (Thai) PLC (SCBT) in 2017 by TISCO could potentially enhance TISCOB’s retail banking franchise. With the transaction, TISCOB also acquired a customer base of mortgage loans and home-equity loans as well as retail depositors. The bank has offered its banking and wealth management products to these acquired customers. This lowered the bank’s reliance on HP lending to 54.1% of total loans at the end of March 2018, from 60.7% a year earlier. Housing loans increased to 8.1% of total loans, up from 0.4% in a previous year. The bank will build on its expertise in auto lending by focusing on car-pledged loans.
We expect TISCOB to maintain strong capital and profitability. At the end of March 2018, the bank’s Basel-III compliant core equity tier-1 (CET-1) ratio was 16.60%, a strong figure for Thai commercial banks. The CET-1 accounted for 77% of total capital. In our view, the capital is sufficient to support business expansion over the next few years, taking into account our assumption of 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 annualised return on average assets (ROAA) of 1.73% in the first quarter of 2018 (Q1/2018), compared with a peer average of 1.36%.
Contributions from fee and service income, an indicator of quality of earnings, were comparable to the average of other Thai banks. Net interest and dividend income represented 71% of total revenue in Q1/2018. Net fees and service income represented 21% of total revenue. The bank’s risk-adjusted net interest margin (NIM) was 0.80%, well above the industry average of 0.52% in Q1/2018.
We expect the bank’s credit cost to decline to a normalised level in the average of 1.0%-1.1% in 2018-2020, below its peak of 2.0% in 2015. The figure rose due to its exposure to a large corporate customer in the steel industry. Annualised credit cost declined to 1.4% in 1Q/2018 and 1.2% in 2017. These remained above the normalised level, in part, due to loans acquired from SCBT. Over the past three years, TISCOB’s asset quality is on an improving trend. The reported non-performing loan (NPL) ratio fell steadily from 2.9% in 2015 to 2.2% at the end of March 2018, lower than peers’ average of 3.8%. The NPL coverage ratio improved to 212% at the end of March 2018 from a low of 81% at the end of 2015.
TISCOB’s ratings remain constrained by its relatively weak funding profile, typical of smaller Thai banks. These banks tend to have a relatively lower proportion of sticky retail deposits and a higher reliance on wholesale funding. Deposits as a percentage of total funding were 72% at the end of March 2018, below the Thai banks’ average of 86%. Current account savings account (CASA) to total deposits of 31% over the same period stayed below peers’ average at around 60%. The loan-to-deposit ratio was down to 134.4% at the end of March 2018 from 138.5% in the same period last year, also well above the Thai bank average of around 100%.
RATING OUTLOOK
The “stable” outlook reflects our 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.
TISCO Bank PLC (TISCOB)
Company Rating: A
Issue Ratings:
Up to Bt100,000 million senior unsecured debentures due within 5 years under the MTN program: A
- TISCO18NA: Bt5,000 million senior unsecured debentures due 2018 A
- TISCO191A: Bt5,000 million senior unsecured debentures due 2019 A
- TISCO193A: Bt5,000 million senior unsecured debentures due 2019 A
- TISCO194A: Bt5,000 million senior unsecured debentures due 2019 A
- TISCO195B: Bt8,000 million senior unsecured debentures due 2019 A
- TISCO197A: Bt5,000 million senior unsecured debentures due 2019 A
- TISCO198A: Bt3,000 million senior unsecured debentures due 2019 A
- TISCO204A: Bt4,000 million senior unsecured debentures due 2020 A
- TISCO205B: Bt6,000 million senior unsecured debentures due 2020 A
Rating Outlook: Stable