TRIS Rating Co., Ltd. has assigned the company rating to Secondary Mortgage Corporation (SMC) at “A+” with “stable” outlook. The rating is enhanced from SMC’s stand-alone rating by the strong governmental support, as SMC is a special financial institution (SFI) that is 100% owned by the Ministry of Finance (MOF). The corporation has a mission to promote the secondary mortgage market. SMC has a competitive advantage from special legal and regulatory support and tax privileges under the Emergency Decree on Secondary Mortgage Finance Corporation B.E. 2540. SMC has just recovered after writing off problem loans in 2007, and is settling internal operating systems to support a planned expansion. Although the composition of its board members was well-designed to support the mission, the stand-alone rating is also constrained by SMC’s short track record to perform its mission due to the unfavorable environment of the secondary mortgage market, inadequate internal infrastructure, and less competitive funding costs compared with commercial banks and other SFIs.
The “stable” outlook for SMC reflects the expectation in the medium term that the management team will be able to improve operating efficiency and performance as planned. The outlook also reflects the expectation that SMC’s relationships with the government and related state entities along with the business and financial support from the government remain unchanged in the future. It is also expected that SMC will get both direct and indirect support from the government to amend related laws and stimulate demand for mortgage-backed securities. The activities will support the development of the secondary mortgage market in Thailand in the future.
TRIS Rating reported that SMC was incorporated in 1997 under the Emergency Decree on Secondary Mortgage Finance Corporation B.E. 2540, with initial capital of Bt1,000 million. Under the Act, the government can guarantee the debt issuance of SMC up to four times the amount of capital. In January 2009, the MOF injected Bt100 million of new capital into SMC. SMC’s board of directors is composed of the representatives from both governmental entities and private sector including the Fiscal Policy Office, Bank of Thailand (BOT), Securities and Exchange Commission (SEC), Government Housing Bank (GHB), and Land Department, together with no more than four qualified persons and SMC’s managing director.
SMC has a mission to develop a secondary mortgage market. SMC’s role is to promote growth of the primary mortgage market by increasing liquidity and reducing risks of lenders, to promote capital market development by issuing mortgage-backed securities (MBS) or long-term financial instruments, and to enhance availability of long-term fixed rate loans for home buyers. SMC provides additional liquidity in the banking system by acquiring mortgage loans from financial institutions in the primary markets, then pooling mortgage loans to create MBSs, and selling the securities to investors. However, an unsupportive environment has limited SMC’s growth prospects because commercial banks currently have sufficient liquidity and strong capital base. The banks, therefore, prefer to retain mortgage loans in their portfolios. Mortgage loans generate high margins and have low risk weight compared with other types of consumer loans and also commercial loans. To fulfill the mission to establish a secondary mortgage market and to enhance economic stability for the country, support from the government and regulators in offering incentives to loan originators to transfer the mortgage loans to SMC is one of the key success factors.
TRIS Rating said, SMC’s investment in mortgage loans had grown continuously since inception, rising from Bt350 million in 1999 to Bt4,520 million in 2005. However, in late 2005, SMC detected irregularity in the loan acquisition process. SMC actively resolved the problem loans in 2006 and 2007 and ceased all new business acquisition, making the loan investment portfolio decline to Bt1,642 million as of September 2009. In 2007, SMC sold Bt2,052 million in non-performing loans (NPL), and booked losses of Bt318 million. After the NPL sale, the amount of the outstanding loans reduced from B4,520 million in 2005 to Bt1,997 million in 2007. SMC posted a loss of Bt329 million in 2007, following annual losses of Bt99 million in 2006 and Bt120 million in 2005, due mainly to provisions for bad debt and doubtful accounts of Bt110 million in 2006 and Bt132 million in 2005, respectively. In 2008, SMC reported a Bt22 million net profit after a three consecutive yearly losses. For the first nine months of 2009, net profits was Bt13 million.
The improvement in financial performance in 2008 and the first nine months of 2009 was mainly due to a dramatic rise in interest spread from 0.2% in 2007 to 2.5% in 2008, following an increase in interest yield. The interest yield rose from 4.5% in 2007 to 6.9% in 2008, due to an increase in performing assets and an improvement in collection management. For the first nine months of 2009, the annualized spread increased to 3.3%, though a slight decline in an annualized yield to 6.5%, because an annualized funding cost fell to 3.2% from 4.4% in 2008. However, SMC still has less competitive funding costs compared with other financial institutions where deposit-taking from the public is allowed. As a result, SMC cannot offer long-term fixed rate products to home buyers at the attractive rate.
For the first nine months of 2009, SMC’s funding base was short-term promissory notes, enabling SMC to get a lower cost of funds as interest rates fell, but exposing SMC to market risk and liquidity risk. SMC had a huge negative maturity gap for assets and liabilities with less than 0-3 month duration. However, on 29 December 2009, SMC succeeded to issue Bt420 million of mortgage-backed securities, which partly mitigated the mismatch in the asset and liability structure.
By the end of 2007, SMC appointed a new managing director and some key managers were recruited after that. Since 2008, SMC has developed internal systems to reduce inefficient and loose operational practices. SMC has also redefined the criteria to acquire loans and developed a loan monitoring policy to effectively control NPLs. The ratio of NPLs to total loans fell from 39.8% in 2006 to 6.9% in 2007. However, the ratio increased to 8.9% in 2008 and to 11.6% as of September 2009. Ability to control asset quality during portfolio expansion period has yet to be monitored.
SMC has a strong capital fund and sufficient allowance for doubtful accounts to absorb losses from asset quality deterioration. The ratio of non-performing assets (NPA) to capital funds plus allowances for doubtful accounts increased to 1.4 times at the end of 2005, but reduced to 0.23 times in 2007 when SMC sold the NPLs. In 2008, the ratio was 0.25 times, which was better than the average of 0.84 times for all 12 universal banks and 1.0 times for the six SFIs in 2008. For the first nine months of 2009, the ratio sustained at 0.25 times, while the average ratio for 12 universal banks improved to 0.79 times.
SMC has been developing information technology, risk management and internal control systems to enhance its operating efficiency in the long term, as its portfolio is expected to grow continuously in the future. At the same time, improvement of staff competency is also crucial to enhance loan servicing and monitoring quality according to the business growth plan. In 2010, SMC will continue to ally with a few financial institutions to offer long-term fixed rate mortgage loans. This will help boost brand awareness among home buyers as well as increase the loan portfolio. Long-term fixed rate loans will be a unique product offered to home buyers. At the same time, TRIS Rating takes into consideration the cooperation among SMC and GHB in transferring a portion of GHB’s housing loans portfolio to SMC in 2010. The challenge of the corporation in the future is to fulfill its mission as a government-related entity to promote mortgage loans, along with improvement of its operating efficiency with standardized risk management system and practices, said TRIS Rating. -- End
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