TRIS Rating Co., Ltd. has assigned the company rating of Siam City Bank PLC (SCIB) at “A” and has assigned the rating of SCIB’s proposed issue of up to Bt15,000 million in subordinated debentures at “A-” with “stable” outlook. The ratings reflect the management team’s ability to run a medium-sized bank with a nationwide branch network, high liquidity, good liquidity risk management, strong deposit base, and sufficient capital funds to absorb certain amount of losses from unexpected downside risks. The risks are associated with sharp declines in the economic growth and unfavorable operating environment. The ratings also take into consideration the higher credit risk, following an anticipated rise in non-performing loans (NPL). In addition, the ratings reflect future uncertainty due to the likelihood of a change in the major shareholder, which might affect business growth and profitability during the transition period.
The “stable” outlook reflects the expectation that SCIB will deliver the expected financial performance over the medium term. The outlook reflects the additional expectation that NPLs will be controlled so that it will not deteriorate sharply as was the case during the past three years. The bank’s good liquidity risk management system, experienced management team, and sufficient capital fund will help mitigate future downside risks. However, the management team’s ability to implement the business plan and control asset quality deterioration has yet to be proved.
TRIS Rating reported that SCIB’s major shareholder is Financial Institutions Development Fund (FIDF), which has held a 47.58% stake since 2004. As of March 2009, SCIB was the seventh largest commercial bank in Thailand in terms of assets, with 5% market share in loans and in deposits. Total assets were Bt421 billion as of March 2009, while total loans and total deposits were Bt281 billion and Bt343 billion, respectively. SCIB’s deposit base is considered strong, making its average funding costs relatively lower than other medium-sized banks. Average roll-over rate of deposits was higher than 90% in 2008.
Financial performance in 2008 improved substantially from 2007. SCIB reported net profit of Bt4,114 million in 2008, a considerable reversal from a huge net loss of Bt2,029 million in 2007 due to a huge loan loss provision according to IAS39 criteria. The bank’s return on average assets (ROAA) and the return on average equity (ROAE) improved in 2008 to 0.99% and 10.60%, respectively, from -0.49% and -5.55% in 2007. For the first quarter of 2009, net profit was Bt651 million, a 51% drop from the same period in 2008. The non-annualized ROAA and ROAE were 0.15% and 1.56%, respectively, down from 0.32% and 3.57% for the first quarter of 2008. Rising NPLs remain a major concern. The rise might affect the profitability in the medium term. The management team will face challenges to improve asset quality and to grow the base of profitable assets amid unfavorable economic conditions.
Asset quality has continuously deteriorated from 2006 to March 2009, and is expected to further deteriorate during the remaining period of 2009, as an unfavorable economic climate continues to pressure the financial health of borrowers. The ratio of NPLs to average loans has continuously increased, rising to 8.8% as of March 2009, from 2.6% in 2005. This level is above the industry average of 7.2% for the 12 universal banks. At the same time, the ratio of non-performing assets--NPAs (classified loans that are more than three months past due, plus the outstanding amount of troubled debt restructurings and foreclosed property) to total assets also increased, rising to 13.0% as of March 2009, from 9.1% in 2005. The bank plans to sell approximately Bt10 billion of NPAs within 2009, which will improve overall asset quality.
The ratio of allowance for doubtful accounts was 120% of the Bank of Thailand (BOT) minimum requirement. This is still lower than the industry average of 137% for the 12 universal banks as of March 2009. The NPL coverage ratio declined slightly to 62% at the end of March 2009, from 65% at the end of 2008, and lower than the average of 67% for the 12 universal banks.
SCIB had sufficient capital funds, as shown by the BIS ratio of 10.51% and the Tier-1 capital ratio of 9.80% at the end of March 2009. However, the BIS ratio was lower than an average of almost 15% for the 12 universal banks. The proposed issue of up to Bt15,000 million subordinated debentures will strengthen the BIS ratio to around 15% in 2009, which is in line with the industry average. NPAs were 1.1 times its capital funds plus the allowance for doubtful accounts. This indicates sufficient cushion of capital fund and allowance for doubtful accounts to absorb unexpected losses from future risks associated with adverse changes in the operating environment.
In case that FIDF divests its shareholding in SCIB to a strategic investor. After the change of the major shareholder, SCIB may face uncertainty due to organization changes and business restructurings during a transition period, said TRIS Rating. -- End
Company Rating: A Issue Rating: Up to Bt15,000 million subordinated debentures due 2019 A- Rating Outlook: Stable
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