SUMMARY
The Coronavirus (COVID-19) pandemic has caused severe economic and social impacts globally. The impact on businesses in Thailand has been escalating, and is felt in every business sector, including financial institutions (FIs). It is difficult to assess the full impact at this point in time as the situation is still highly fluid with no clear signs of when the pandemic will be largely contained. Nevertheless, TRIS Rating has conducted a preliminary industry-focused assessment to gauge the potential impact on rated FIs, including banks and non-bank FIs (NBFIs).
Stable outlook for banks in Thailand
Our stable outlook for commercial banks in Thailand remains unchanged for the time being. Despite the likelihood of increasing revenue pressure and weaker asset quality, we are of the view that the potential negative impacts are unlikely to escalate to the extent of affecting the banks’ ratings.
While our concerns lie more with the tendency of a decline in asset quality and higher credit cost, we believe these may partly be mitigated by the regulatory forbearance announced by the Bank of Thailand (BOT). In our view, the BOT’s measures should give both lenders and borrowers a breather by relieving their burdens temporarily to provide time for financial recovery. At a time when FIs in Thailand are already under the stress of implementing the TFRS 9 standard starting this year, we find the regulatory forbearance particularly helpful. In any case, the stress test we have performed on rated banks suggests that there is still ample room for credit cost to rise before affecting bank ratings.
Liquidity and refinancing risk manageable for most NBFIs, for now
We also maintain a stable outlook for NBFIs as we view the negative impact on the ratings of NBFIs to be moderate. This is despite their exposure to refinancing and liquidity risk given that part of their funding is sourced from the capital market whose risk-off sentiment has dried up the liquidity. Based on our preliminary assessment and surveys with all rated NBFIs, most currently have sufficient bank credit facilities to refinance or support the repayment of outstanding debt issues due over the next 12 months. A number of the rated NBFIs also have financial support from financially strong parents.
Based on our industry-focused assessment (Fig. 1), the distressed asset management industry could potentially be pressured by weaker cash flows from loan collections, while leasing and hire purchase businesses could potentially face a greater impact in terms of a decline in business volume. For the credit card and personal loan as well as title loan industries, the resulting weaker cash flows from the BOT’s debt relief measures could be a challenge. On the other hand, their business volume is likely to remain resilient given the stronger loan demand during the time of a weak economy.
• Banks
Banks in good position to bolster corporate lending, but may face weaker asset quality and revenue pressures
Liquidity is the focus at this point in time when all businesses are scrambling to secure as much liquidity as possible to get through the tough time ahead. Banks have become the only source of liquidity most businesses can look to when the capital markets are facing turbulence as most investors have become risk averse. With strong balance sheets and stable deposit base, banks are in a good position to leverage on their ample liquidity to bolster their lending businesses. However, banks will need to weigh the credit risk given the challenges that many businesses will be facing.
1) Asset quality
The tendency that some borrowers may not be able to service their debts due to the lower or absence of income could result in asset quality deterioration and rising credit costs for banks. Nevertheless, we believe the BOT’s measures to support lenders and borrowers should help ease provisioning risks for banks to some extent (Fig.3). The stress test we performed on rated banks (where credit cost is raised to the point that the CET-1 capital ratio falls to a lower category) suggests that for most banks, credit cost would need to rise significantly from the current level. This implies that the likelihood of rating downgrades as a result of higher credit costs remains minimal at this point in time.
2) Revenue generation capacity
Banks are has a tendency to report lower profits but this is unlikely to impact their ratings. In fact, we view that the debt relief measures should partly mitigate the impacts of lost revenue from loans that would have defaulted without these measures. That said, banks’ asset yields may remain under pressure because of the lending rate cuts (Fig. 2). At the same time, the positive impact from the TFRS9 standard that allows FIs to recognize interest income from non-accrual loans starting this year may not be large enough to eliminate the revenue pressures banks are facing.
• NBFIs
As for NBFIs, our assessment is focused on a few key credit drivers.
1) Business volume and revenue
Most of the NBFI lenders could see lower business volume and/or revenue this year. We assess the potential impact of revenue drop by industry in Fig. 1.
Distressed asset management
The distress asset management companies (DAMCs) could see a disruption of cash flows from debt collections this year given the diminished income of debtors, especially for unsecured distressed asset purchasers. As for companies with distressed assets secured by properties, the ability to dispose of the properties to generate cash flow could be a major challenge. In any case, we see the likelihood of rating downgrades for these companies resulting from falling revenues to be low at the moment. That said, in terms of business volumes, the weak credit market may actually allow DAMCs to acquire larger volume of non-performing assets at low cost, depending on each company’s ability to fund the asset purchases.
Rated companies in this segment:
JMT Network Services (JMT), Bangkok Commercial Asset Management (BAM).
Leasing and hire purchase
This industry includes companies that offer hire purchase (HP) loans to retail customer for the purchase of passenger cars, commercial vehicles and motorcycles as well as the companies that provide operating lease for auto fleets and other types of assets to corporates and SMEs.
Leasing companies could see greater impacts on their business volume than companies in other NBFI segments. The business prospects of the auto industry were already weak. Based on Toyota Motor Thailand’s current estimate, sale of all types of vehicles is expected to contract collectively by 6.7% in 2020 (after a 3.3% decline in 2019). However, we believe sales could slip further as the estimates have not taken into account the potential fallout from the COVID-19 pandemic, especially when automakers are suspending production plans. For operating lease, lenders could also face slower demand, given the adverse impact on the manufacturing and export sectors. Additionally, sales of assets retrieved from expired lease contracts could be a major challenge. As with banks, we expect lenders in this industry to report lower revenues from the debt relief measures. A greater concern at this juncture is the potential reduction in cash flows from debt repayments.
Rated companies in this segment:
Asia Sermkij Leasing PLC (ASK), Ayudhya Capital Auto Lease PLC (AYCAL), Bangkok Mitsubishi UFJ Lease Co., Ltd. (BMUL), BSL Leasing Co., Ltd. (BSL), Eastern Commercial Leasing PLC (ECL), Honda Leasing Thailand Co., Ltd. (HLTC), Mida Leasing PLC (ML), Ratchthani Leasing PLC (THANI), S11 Group PLC (S11), Thitikorn PLC (TK), TISCO Tokyo Leasing Co., Ltd. (TTL), Toyota Leasing (Thailand) Co., Ltd. (TLT), Krungthai Car Rent & Lease PLC (KCAR), Phatra Leasing PLC (PL).
Credit card/Personal loan
Companies in this industry are likely to experience low impacts on outstanding loans as the reduction of minimum payment translates into a higher revolving rate and a more gradual contraction of existing loan portfolios. Adding new loans from card acquisitions and personal loan expansion, we could still see total outstanding loans rising this year. On business volume, however, we believe card acquisition and personal loan growth targets may not be achieved. There would still be some expansion of customer bases, but selectively. In light of card spending, increased on-line spending may partly offset the weakness in off-line spending and traveling due to the economic slowdown and the COVID-19 outbreak. The revenue impact will come from the reduction in the minimum payment rate. Based on the additional measures recommended by the BOT on 25 March 2020 (effective 1 April), the minimum credit card payment is set at 5% in 2020-2021, 8% in 2022 and 10% in 2023, while the minimum repayment for personal loans may fall below the current 5%. Concerns over asset quality may also be alleviated by the financial support and strong risk management approach of the lenders.
Rated companies in this segment:
Krungsriayudhya Card Co., Ltd. (KCC), Krungthai Card PLC (KTC)
Title loans
Lenders that provide title loans (personal loans secured by assets) may also see cash flows decline from the debt relief measures including the 3-month grace period for principal and interest or the 30% reduction in the installment amount. If there is an interest rate cap as suggested by the BOT at 22%, pending confirmation, we expect the effect to be modest as most lenders are already charging similar rates. On the positive side, we expect business volume may be quite resilient given that loan demand in this industry tends to be strong during weak economic environments.
Rated companies rated in this segment:
Srisawad Power 1979 PLC (SAWAD), Srisawad Finance PLC (BFIT), Ngern Tid Lor Co., Ltd. (NTL), Muangthai Capital PLC (MTC).
2) Liquidity and refinancing risk
With the potential decline in cash flows from borrowers, our concern is whether the cash flows will be sufficient for debt repayment by the NBFI lenders. We asses this by dividing the companies into two major groups (Fig. 4): 1) companies with parent or group support (owned by commercial banks or shareholders with strong credit profiles); 2) companies without parent support.
Liquidity concerns for NBFIs with no parent support are minimal
For companies with group support, there is little concern over liquidity risk. However, for the group with no parent support, the liquidity and refinancing risk hinges on the amount of debt outstanding, financial leverage and availability and diversity of funding/liquidity sources. Based on our database and surveys with rated NBFIs, there are a few companies that require close monitoring. Nonetheless, the following observations have helped alleviate our concerns to a great extent.
• Most companies have sufficient funding support from banks in the form of credit facilities to ensure repayment of outstanding debt instruments over the next 12 months.
• A number of companies with strong cash flows are planning to use internal cash to redeem debt issues due within this year.
• Those that plan to issue new bonds are canceling their issuing plans and will turn to banks for credit lines.