TRIS Rating affirms the company rating on TISCO Bank PLC (TISCOB) and the ratings on its senior unsecured debentures of up to Bt70 billion, due within 2025, at “A” with a “stable” outlook. The ratings reflect TISCOB’s stable franchise in auto lending as well as strong capital and earnings. These strengths, however, are constrained by TISCOB’s relatively modest banking operations.
KEY RATING CONSIDERATIONS
Strength in auto lending with moderate revenue diversity
TISCOB’s business position is underpinned by its strength in auto hire-purchase (HP) lending. According to TRIS Rating’s database, TISCOB secured a 7.8% market share in 2018, ranking 4th out of 18 auto HP lenders in Thailand. However, its overall banking operation remains modest.
TISCOB’s revenue diversity is moderate, compared with peers, as the majority of income derives from lending business, with net interest and dividend income making up 78% of its total revenue in 2019. Nonetheless, net fees and service income constitute a large portion of non-interest income, at 32% in 2019. This mainly comprises fees from bancassurance (48% of total fee) that ties to its auto lending business.
Auto lending still dominates banking book
We expect the TISCO Group to continue to capitalize on its expertise in the auto HP lending and the high-yielding auto title loans. The title loan segment includes loans booked at TISCOB and TISCO Financial Group PLC’s (TISCO) subsidiary, Hi-Way Co., Ltd., under the brand “Somwang Ngern Sang Dai”. With its yield enhancement strategy, the bank has been focusing more on growing auto title loan portfolio in the recent years. The title loan segment booked at TISCOB has thus expanded more than the auto HP lending, up 11.3% in 2019, compared with a contraction of -1.3% for auto HP. We expect the bank to still emphasize secured lending, particularly the high-yield auto title loans, due to rising credit risk and the declining interest rate.
Solid capital
TISCOB’s capital position is strong relative to other Thai commercial banks, in TRIS Rating’s view. As of the end of 2019, TISCOB’s CET-1 was at 17.4%. We forecast TISCOB’s core equity tier-1 (CET-1) ratio in a range of 17%-18% over the next three years. The estimate is based on our assumption of a negative loan growth in 2020 and a growth of around 2% thereafter, and a dividend pay-out ratio in the range of 65%-75%. The CET-1 ratio accounted for 72% of total capital at the end of 2019, indicating an average quality of capital.
Healthy earning supports capital
We expect TISCOB to maintain its high profitability, sufficient to withstand potential volatility across credit cycles. Despite the declining interest rate environment, TISCOB’s loan yield has been relatively resilient due to its focused growth on the high-yielding auto title loan. The stronger loan yield and relatively well-controlled asset quality has resulted in a healthy risk-adjusted net interest margin (NIM). The risk-adjusted NIM of TISCOB was at 3.8% in 2019, well above the industry average of 2.1%. We forecast TISCOB to maintain risk-adjusted NIM at around 3.1%-3.3% over the next few years. Moreover, the bank’s low operating expenses have also helped support its profitability. Its average return on asset (ROAA) was at 1.8% in 2019, above the Thai commercial banks’ average of 1.3%. We forecast its cost-to-income ratio to range 44%-45% and ROAA to be at 1.3%-1.5% in 2020-2022.
Asset quality deterioration likely to be contained
Although the full impact from the coronavirus (COVID-19) pandemic is still unclear, we believe TISCOB’s prudent risk management and selective credit expansion strategy as well as the support from the Bank of Thailand (BOT) on debt relief measures may help alleviate the impact in terms of credit cost. In terms of asset quality, the non-performing loan (NPL) ratio of TISCOB was 2.4% in 2019, compared with 2.9% in 2018. The lower NPL ratio is attributed to the normalizing of NPL classification after the completion of revenue recognition system in the third quarter of 2019 (Q3/2019). We expect deterioration of asset quality to remain relatively contained in 2020 due to its modest exposure to vulnerable segments such as small and medium enterprises (SMEs) (5% of total loans). The majority of its HP lending include captive-financing for new cars which tends to have good asset quality.
Less reliance on wholesale funding
TISCOB’s funding profile is considered below average of Thai banking sector, given a relatively lower proportion of retail deposits. Its current account-savings account (CASA) to total deposit continued to trend downward to 19% at the end of 2019 from 29% a year ago. On average, the deposit cost and funding cost of TISCOB remains above that of Thai commercial bank’s average. Nevertheless, the bank’s deposits as a percentage of total funding rose to 91% at the end of 2019, from 79% at the end of 2018. Although the growth in terms of deposits and lower borrowings may be caused by the need to comply with net stable funding ratio (NSFR) requirements, we view this as a positive move as it indicates that TISCOB has relied less on wholesale funding. The increase in deposits, together with the flat loan growth, has resulted in its loan-to-deposit ratio falling to 109% at the end of 2019 from 121% at the end of 2018.
Adequate liquidity
We assess TISCOB’s liquidity as adequate. The liquid asset to total asset ratio was 19% at the end of 2019. The liquidity coverage ratio (LCR) stood at 134% at the end of the first half of 2019, above the regulatory requirement but weaker than the average for Thai banks of 179% reported by BOT.
BASE-CASE ASSUMPTIONS
The followings are our base-case assumptions for TISCOB’s performance during 2020-2022:
• Loan growth to be negative in 2020 and increase to around 2% thereafter.
• Credit cost of 1.0%-1.2%.
• NPL ratio of 2.2%-2.4%.
• CET-1 ratio at 17%-18%.
• Risk-adjusted NIM at 3.1%-3.3%.
RATING OUTLOOK
The “stable” outlook reflects our expectation that TISCOB will maintain its strength in auto lending, good asset quality, high earnings capacity, and strong capital.
RATING SENSITIVITIES
A rating upgrade will depend on TISCOB’s ability to sustain its strong capital, diversify its banking businesses and/or improve its funding. A downgrade scenario would emerge if there is material weakness in TISCOB’s asset quality, capital, and profitability.
COMPANY OVERVIEW
TISCOB, formerly named “TISCO Finance PLC”, was established in 1969 and 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 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 the 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 Insurance Solution Co., Ltd., 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.
In 2016, the TISCO Group entered into an agreement to acquire the retail banking business of Standard Chartered Bank (Thai) PLC (SCBT). The unsecured consumer loans (credit card loans and personal loans) with combined portfolios totalling Bt5.2 billion were later sold to Citibank N.A., Bangkok branch.
TISCOB is a small commercial bank with asset size of Bt285 billion at the end of 2019 and a 1.8% market share in loans and a 1.7% share in deposits.
RELATED CRITERIA
- Banks Rating Methodology, 3 March 2020
- Group Rating Methodology, 10 July 2015
TISCO Bank PLC (TISCOB)
Company Rating: A
Issue Ratings:
Up to Bt70,000 million senior unsecured debentures due within 2025 A
- TISCO204A: Bt4,000 million senior unsecured debentures due 2020 A
- TISCO205B: Bt6,000 million senior unsecured debentures due 2020 A
- TISCO208A: Bt2,000 million senior unsecured debentures due 2020 A
- TISCO213A: Bt2,320 million senior unsecured debentures due 2021 A
- TISCO223B: Bt2,220 million senior unsecured debentures due 2022 A
Rating Outlook: Stable