TRIS Rating affirms the company rating of Land and Houses Bank PLC (LH BANK), a subsidiary owned (99.99%) by LH Financial Group PLC (LHFG), at “A-”. TRIS Rating also affirms the rating of LH BANK’s Basel III Tier 2 capital securities at “BBB”. At the same time, TRIS Rating revises the rating outlook of LH BANK to “stable” from “positive”. The revision reflects a lengthened period of time beyond our initial expectation that the bank will be able to leverage on its strategic alliance with CTBC Bank Co., Ltd. (CTBC Bank) from Taiwan. These include expanding its client base, raising contribution of fees and service income and/or lowering its credit concentration.
The ratings also take into consideration LH BANK’s strong capital and good asset quality. On the contrary, the bank’s modest franchise, high concentration of corporate loans, and a relatively high reliance on wholesale funding constrain its rating
KEY RATING CONSIDERATIONS
A new platform for growth
Despite a slower progress than our anticipation, we still expect LH Bank and other subsidiaries of LHFG to gradually expand its franchise and diversify sources of earnings from its new businesses. Longer term, we expect a gradual growth in net fee income as a percentage of total revenue from 4.7% in 2018.
The group recently launched new products and services to serve business clients include trade finance, foreign-exchange, foreign-currency deposit, and payroll services. Meanwhile, LHFG is pursuing new strategy while building capacity in the existing areas of business banking, transaction banking, and wealth management. In transaction banking, for example, it seeks to tap potential synergies with its new partner, “QFPay”, a Chinese-based mobile payment platform. The strategy is to bring onto QFPay’s platform a large number of tenants of Terminal 21 shopping malls and five-star Grande Centre Point hotels, both of which are owned and operated by LH Mall and Hotel Co., Ltd (LHMH), a subsidiary of Land & Houses PLC (LH, rated “A+”/Stable by TRIS Rating), LHFG’s parent. Terminal 21 malls and Grande Centre Point hotels are located in tourist spots. This could potentially create massive volume of payment transactions, which bodes well for LH Bank’s fee income generation in the future.
Another new strategy is integrating LHFG’s securities brokerage and asset management services with LH Bank’s mobile banking platforms to expand the group’s product and service offerings to the bank’s wealth clients.
Modest banking franchise
The new businesses will add value to the bank’s modest franchise. Market shares in loans and deposits were at 1.3% and 1.4% in 2018, respectively. Total assets were Bt239 billion as of the end of 2018, ranked 11th among Thai commercial banks.
Capital to remain strong
We expect LH BANK to maintain its strong capital. We forecast LH Bank’s Basel-III compliant core equity tier-1 (CET-1) ratio in a range of 17%-18% over the next three years, sufficient to support its business expansion. We also assume the bank’s loan growth of around 6%, and a dividend pay-out ratio of 40% of net profit. CET-1 ratio accounted for 85% of total at the end of 2018, indicating a high quality of capital.
Healthy asset quality but credit concentration remains a concern
LH BANK has a higher credit concentration, compared with other small- and mid-sized Thai banks rated by TRIS Rating. A small number of the bank’s largest clients make up a substantial portion of the loan portfolio and deposit funding. The concentration reflects the bank’s focus on corporate lending. Corporate loans made up 75% of total loans at the end of 2018. LH BANK also lacks a broad base of retail customers and does not have a wide range of funding sources.
Nonetheless, LH BANK’s asset quality has been strong. LH BANK will continue to focus on high quality Thai corporate borrowers and tap Taiwan-affiliated businesses in Thailand. LH BANK prefers lending to high quality corporate borrowers and making low-risk residential mortgage loans. The gross non-performing loan (NPL) ratio, including interbank and money market items, was 1.92% at the end of 2018 compared with commercial bank average of 3.1%.
Strong reserves and stable loss experience
The bank’s loss experience has been better than the industry average. Credit cost is low, thanks to strong asset quality. The figure was 0.4% in 2018, compared with commercial bank average of 1.4%. The credit cost over the last five years (2014-2018) averaged 0.6% (2017: 0.4%). These values are well below the commercial bank average of 1.4%. Loan loss reserve to reported NPLs was 107% at the end of 2018, higher than the 80%-90% levels reported in 2014 and 2015. The bank sold Bt343 million of NPLs in 2018 (vs. Bt512 million sold in 2017) and wrote off by an estimate of Bt63.0 million in NPLs (vs. Bt14.5 million in 2017).
Funding improved
LH BANK’s funding is generally weaker than other banks rated by TRIS Rating, but has improved over recent years. Compared with mid- to small-sized peers, LH BANK’s deposit franchise is now stronger because deposits have expanded steadily since 2013. Deposits at the end of 2018 accounted for 83% of the funding base, compared with 60%-70% for other small banks rated by TRIS Rating. LH BANK’s current account-savings account (CASA) to total deposits was at 48% of total deposits at the end of 2018, from about a 40% range in 2014-2016. The rise is a result of the new “Biz Saving” product for corporate/small and medium enterprise (SME) customers. We also believe recent growth in term deposits reflects a move to comply with net stable funding ratio (NSFR) requirements and to secure low funding costs. The loan-to-deposit ratio fell to 96% at the end of 2018 from about 107% in 2017, reflecting a strong deposit growth. The value remains somewhat below peers’ average of 100% at the end of 2018.
Adequate liquidity
LH BANK’s liquidity is adequate. The liquid asset to total asset ratio was at 33% at the end of 2018, comparable to other Thai banks. LH BANK’s liquidity coverage ratio (LCR) is above the regulatory requirement , but weaker than smaller bank’s average of 158% and commercial bank’s average of 184%, as reported by the Bank of Thailand (BOT).
Basel III-Compliant Tier-2 Capital Securities Rating
The “BBB” rating for LH BANK’s Basel III Tier 2 capital securities (LHBANK255A) reflects the subordination and non-payment risk of the securities, as defined by the non-viability loss absorption clause in the bond indenture. The features of the securities comply with BASEL-III guidelines and the securities qualify as Tier-2 capital under the BOT’s criteria. The securities are subordinated, unsecured, non-deferrable, and non-convertible. The securities are also callable by LH BANK 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 LH BANK’s depositors and holders of LH BANK’s senior unsecured debentures. The principal can be written down in the event that the regulator deems the bank to be non-viable, in accordance with the non-viability clause.
BASE-CASE ASSUMPTIONS
The followings are our base-case assumptions for 2019-2021F
• Loan growth: around 6%
• Credit cost: around 0.4%
• NPL ratio: 2.2%-2.3%
• CET-1 ratio: 17%-18%
• Risk-adjusted NIM: around 1.8%
RATING OUTLOOK
The “stable” outlook reflects our expectation that LH Bank, will still benefit from CTBC Bank’s business and capital support. We expect this to be evidenced by gradual expansion of its banking franchise and client base as well as an increase in contribution of fees and service income. At the same time, we expect LH Bank’s credit concentration trend downward in the medium term.
RATING SENSITIVITIES
The rating upgrade hinges on the success of LH BANK’s effort to expand its franchise and revenue. For its rating to be upgraded, we expect to see a stronger evidence of improvements at LH Bank, including more diversified customer base, stronger market share in loans and deposits, higher net fees and service income as a percentage of total revenue, and lower credit concentration. At the same time, the bank should maintain sound asset quality, capital base, and profitability. We could revise a rating downward if its capital weakens significantly and/or there is material deterioration in its asset quality or earnings capacity.
COMPANY OVERVIEW
LH BANK is a 99.99%-owned subsidiary of LHFG. LH BANK is 11th largest commercial bank in Thailand, with 1.3% and 1.2% market share in loans and deposits in 2017, respectively. The bank has a network of 133 branches.
On 27 July 2017, CTBC Bank made a strategic investment by buying 35.6% of LHFG. CTBC Bank became an equal partner with Land and Houses Group in LHFG. Shareholders from Land and Houses Group include Land and Houses PLC (LH) and Quality Houses PLC (QH). Their combined shareholding in LHFG dropped to 35.6% as a result of CTBC Bank’s investment.
CTBC Bank is a bank subsidiary under CTBC Financial Holding Co., Ltd. (CTBC FHC). CTBC FHC is the fourth-largest financial holding company in Taiwan, with assets of TW$5,225 billion at the end of September 2017. Other key subsidiaries under CTBC FHC cover life insurance, securities, venture capital, and asset management. CTBC Bank is well-positioned in wealth management and credit card services, and has well-established in corporate banking business including 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).
With CTBC Bank as a partner, LH BANK has strengthened its board and management structure. There are two new board members from CTBC Bank. An addition of managers from CTBC Bank also oversees new business units. These are 1) the Strategic Business Development unit, in charge of new product development such as trade finance and cash management, and Taiwan Business Development, and 2) the Wealth Management Business Planning unit.
RELATED CRITERIA
- Commercial Banks, 30 March 2017
- Group Rating Methodology, 10 July 2015
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