TRIS Rating affirms the issuer rating on The Federation of Savings and Credit Cooperatives of Thailand Ltd. (FSCT) at ?A-? with a ?stable? outlook. The rating reflects FSCT?s important role in the savings cooperative system, steady operating performance, consistently high loan quality, and the competitive edge of savings cooperatives from tax privileges and priority claim against debtors under the savings cooperative law. The rating is, however, constrained by FSCT?s exposure to market risk from equity investments, concentration risk in loans, relatively high leverage, as well as in our view, inadequate regulatory supervision of savings cooperatives in general.
The rating also takes into consideration FSCT?s readiness to cope and comply with regulatory changes following the enactment of new legislation governing the operations of savings cooperatives.
KEY RATING CONSIDERATIONS
Important role as a financial intermediary
We expect that FSCT will continue to serve as a financial intermediary for its cooperative members by taking deposits from and making loans to cooperative members. FSCT also plays a key role in the promotion and development of the savings cooperative movement in Thailand. FSCT plays an important role in two ways: through its responsibility according to the cooperative laws, and by serving as a representative of its cooperative members. FSCT has participated in a number of national committees and in the activities of the savings cooperative movement in order to support, promote, plan for, and develop the savings cooperative sector in Thailand. FSCT lends to its cooperative members and provides benefits in the forms of consulting services, training, and seminars with the main objective to enhance the operations and financial strength of its cooperative members.
Savings cooperatives enjoy privileges
The privileges granted to savings cooperatives in the forms of tax exemptions and priority claims against debtors remain unchanged. Savings cooperatives and their respective members are exempt from interest savings tax, value added tax, and tax on investment returns. The law also stipulates that a primary savings cooperative has priority claim over any other creditors to receive interest and repayments from its debtors. The priority claim privilege is an important competitive advantage over other lending institutions in lending to cooperative members. Most of the loans extended to ordinary members of primary savings cooperatives are under an arrangement with the borrower?s employer to deduct interest and principal installments from the borrower?s monthly salary. This explains the high loan quality and low credit costs of most primary savings cooperatives which consequently support the loan quality of a secondary savings cooperative like FSCT.
Exposure to market risk and investment portfolio concentration
A key credit concern for FSCT, in our view, is its exposure to market risk due to its investment activities. We view that FSCT has shifted towards a more aggressive investment policy by increasing the weight of investment in equity securities, which is a high-risk asset class in term of price volatility. The ratio of investments to total assets stood at 46% at the end of fiscal year (FY) 2021 (year-ended 31 March 2022). FSCT investment portfolio comprised 44% in equity securities, 38% in fixed-income debentures, and 18% in other investments in FY2021, compared with its pre-2019 investment policy of approximately 5% equity, 85% debentures, and 10% other investments. We expect that FSCT will limit its exposure in equity investments going forward. A higher equity investment exposure would translate into a higher risk position, which would consequently affect its credit profile.
FSCT had an exposure of THB1.9 billion in senior unsecured debentures of Thai Airways International PLC (THAI) at the end of March 2022, accounting for approximately 1% of its total assets and 6% of its total equity. THAI is currently in a court-approved business rehabilitation. The rating has taken into account the effect of allowance for probable losses from the investment in THAI?s debentures according to the Cooperative Auditing Department announcement.
Loan concentration but well managed loan quality
In our view, FSCT is exposed to significant loan concentration risk. The 20 largest loans made to cooperative members accounted for 53% of FSCT?s total loans at the end of FY2021. FSCT provided loans to around 200 cooperative members, out of a total of 1,098 members at the end of FY2021. Loans made to cooperative members represented the largest asset to class (48%) of FSCT?s total assets at the end of FY2021. About 46% of FSCT?s total assets were investments while the remaining 6% was made up of cash and other assets. However, FSCT?s loans concentration risk is mitigated by the high quality of its loan portfolio.
At the end of FY2021, FSCT had THB15.8 million of non-performing loans (NPLs), accounting for only 0.02% of its outstanding loans. FSCT?s high asset quality reflects the low credit risk in lending to primary savings cooperatives whose lending practices are supported by the priority claim privilege and salary deduction arrangements with the borrowers? employers as mentioned above. We also expect that FSCT will continue to maintain its strict lending criteria to sustain loan quality.
High leverage and moderate equity base
FSCT?s equity base, including paid-up share capital, legal reserves, reserves mandated under by-laws, unrealized gains or losses from investments, and net profit, has increased steadily. The leverage ratio accounted for 25% in FY2021. However, it is still at a relatively low level compared with the average of around 40% among large, long-established savings cooperatives. FSCT ended March 2022 with a ratio of capital to assets of 28.5%, well above the regulatory requirement of 15%.
As required by FSCT?s by-laws, the cooperative members need to purchase additional shares in proportion to the paid-up share capital they already own. In a normal situation, FSCT?s paid-up share capital will keep increasing. The paid-up share capital of each cooperative member will increase automatically, thanks to the traditional mechanism of monthly share purchases by members. We expect FSCT will be able to strengthen its capital base if needed in order to cope with any adverse changes in the domestic savings cooperative sector or financial markets.
Sufficient liquidity
We expect FSCT will be able to maintain sufficient liquidity as it has secured credit facilities from several financial institutions. The total amount of available credit facilities should be enough to cover any liquidity shortfalls should they arise.
FSCT?s borrowings from commercial banks have accounted for 7% of FSCT?s total liabilities or 5% of its total assets as of March 2022. All commercial bank borrowings have been short-term. However, in our view, wholesale funding from financial institutions carries a higher level of risk (rollover risk) compared with funding through deposits and borrowings from cooperative members. The high proportion of external short-term funding exposes FSCT to a significant refinancing risk. However, FSCT has an investment portfolio large enough to cover all of the external short-term borrowings, which helps mitigate liquidity risk. Nevertheless, the pledged securities are subject to price risk and potential loss in a forced liquidation scenario.
FSCT?s liquid assets accounted for 51.9% of its total assets as of March 2022. FSCT ended March 2022 with a liquidity ratio of 14.8%, above the regulatory requirement of 6% for the federation of savings cooperatives.
Inadequate regulatory supervision
Savings cooperatives are not subject to the same degree of close supervision and rigorous examinations as banking institutions. In our view, this is the major weakness that constrains the credit standings of savings cooperatives in Thailand. Although the current law lays out the framework for tighter controls on savings cooperatives? activities, effective enforcement of the rules and regulations based on periodic rigorous examinations seems unlikely to happen anytime soon.
Readiness to cope and comply with new regulations
We hold the view that FSCT is well prepared to cope and comply with the new regulations with no serious concerns over its operations since the new law took effect in 2019. The law is basically designed to ensure tighter controls over the deposit taking, lending, and investment activities of savings cooperatives. We view the new law as an important step to alleviate concerns over the long-term stability of savings cooperatives that form an important part of Thailand?s financial system.
Nevertheless, we expect the new law will constrain opportunities for growth and weaken FSCT?s financial performance to some extent. For instance, more stringent investment criteria and reserve requirements for liquidity and loan losses under the law will mean less flexibility in FSCT?s investment activities and lower returns on assets. However, we do not expect the potential impact on profitability will materially affect FSCT?s financial profile.
BASE-CASE ASSUMPTIONS
TRIS Rating?s base-case assumptions for the performance of FSCT during FY2022-FY2024 are as follows:
? Total equity to grow by 2% per annum on average.
? Spread to be in the range of 0.20%-0.33% per annum.
RATING OUTLOOK
The ?stable? outlook reflects our expectation that FSCT will maintain its important role in the savings cooperative system. The outlook also reflects its steady operating performance, high loan quality, and core funding base from its members. We also expect FSCT will be able to comply with the regulatory changes.
RATING SENSITIVITIES
The prospect of a credit upgrade is constrained by the lack of close supervision and rigorous examinations of savings cooperatives in general, as well as the uncertainty of regulatory change. In contrast, a downgrade scenario could arise should there be indications of more aggressive investment policies, especially a significant increase in equity investment. A substantial unrealized loss from investment that significantly affects the capital base would also negatively impact the rating. Any regulatory changes that erode the tax and priority claim privileges currently enjoyed by savings cooperatives could also have a negative effect on the rating.
COMPANY OVERVIEW
FSCT is the first savings cooperative federation in Thailand. The Cooperative League of Thailand (CLT) and 81 savings cooperatives established FSCT as a national savings cooperative federation in 1972. FSCT started operations in 1973. According to the Cooperatives Act, FSCT is a secondary savings cooperative, or a savings cooperative which has primary savings cooperatives as its members.
Over 50 years, the number of members has increased steadily, from 81 cooperative members when it was founded to 1,098 by the end of March 2022. More than two-thirds of all primary savings cooperatives in Thailand are members of FSCT.
FSCT is the largest savings cooperative federation in Thailand, in terms of both asset size and the number of members. FSCT serves as a funding intermediary for its cooperative members by taking deposits from and making loans to its members. FSCT also provides additional benefits for its members, mostly in the forms of consulting and training services.
FSCT plays an important role in the promotion and development of savings cooperatives in Thailand. In addition to striving to fulfill its responsibility in accordance with the cooperative laws, FSCT serves as a representative of its savings cooperative members.
RELATED CRITERIA
- Savings Cooperative Rating Methodology, 28 September 2020
The Federation of Savings and Credit Cooperatives of Thailand Ltd. (FSCT)
Issuer Rating: A-
Rating Outlook: Stable