Bangkok--24 Nov--TRIS Rating
TRIS Rating has affirmed the company rating and the current senior unsecured debenture ratings of Secondary Mortgage Corporation (SMC) at “AA-”. At the same time, TRIS Rating has assigned a “AA-” rating to SMC’s proposed issue of up to Bt1,200 million in senior unsecured debentures due within 2017. The outlook remains “stable”. The ratings reflect the continual improvement in SMC’s stand-alone business profile and the strong support SMC receives from the government. SMC’s stand-alone rating reflects its good business prospects due to its successful cooperative efforts with several leading commercial banks. However, the stand-alone rating is constrained by three challenges. SMC must control the quality of its assets, maintain a sufficient capital base, and improve its operating efficiency after it underwent a sizable expansion during 2011-2014. The “stable” outlook reflects the medium-term expectation that SMC’s management team will improve SMC’s operating efficiency and control its asset quality. The outlook is also based on the expectation that SMC can increase the size of its portfolio as planned by acquiring loans from allied financial institutions. The outlook also reflects the expectation that SMC’s relations with the government and related state entities, along with the business and financial support from the government, will remain unchanged in the future.
SMC is a special financial institution (SFI), 100% owned by the Ministry of Finance (MOF), with a mission to promote the Thai secondary mortgage market. SMC has a competitive advantage by virtue of the special legal and regulatory support it receives, plus the tax privileges granted to SMC under the Emergency Decree on the Secondary Mortgage Finance Corporation Act B.E. 2540 (the SMC Act). The government also shows its support by injecting funds into SMC during the 2014 budget year.
SMC was incorporated in 1997, under the SMC Act, with initial capital of Bt1,000 million. Under the Act, the government can guarantee the debt issued by SMC. However, the guarantee cannot exceed 4 times SMC’s capital. In January 2009, the MOF injected Bt100 million of new capital into SMC. The MOF recently approved an addition Bt130 million injection of new equity capital during the 2014 budget year. SMC’s board of directors comprises representatives from the private sector and from various governmental entities, including the Fiscal Policy Office, the Bank of Thailand (BOT), the Securities and Exchange Commission (SEC), Government Housing Bank (GHB), and the Land Department, together with no more than four qualified directors plus SMC’s managing director (MD). The composition of its board has been carefully designed to support its mission.
SMC was established to create a secondary mortgage market and make long-term fixed rate mortgage loans available to home owners. SMC’s existing loan portfolio comprises mortgage loans acquired from financial institutions. The financial institutions provide mortgage financing services in the primary market. SMC buys the mortgages, pools the mortgage loans as collateral for mortgage-backed securities, then issues and sells the securities to investors.
SMC has good growth prospects, even after it fulfilled many of its strategic objectives. Its loan portfolio in 2014 has almost doubled in value since the end of 2013. SMC has been profitable for seven years, despite having volatile earnings. SMC has inked cooperative agreements with many financial institutions. The allied financial institutions agreed to sell more loans to SMC. During 2009 to June 2014, SMC allied with some financial institutions to originate new mortgage loans worth a total of Bt13,559 million. As a result, the value of SMC’s loan portfolio significantly increased. The value rose from Bt1,732 million in 2011, to Bt4,756 million in 2012, and to Bt8,610 million in 2013. As of June 2014, SMC’s loan portfolio jumped to 57% from the value at the end of 2013, climbing to Bt13,557 million.
SMC faces a challenge as it strives to control the quality of its assets. Due to a problem of asset quality, SMC posted a loss of Bt329 million in 2007, following annual losses of Bt99 million in 2006 and Bt120 million in 2005. SMC wrote off Bt318 million in bad loans in 2007, which pushed the ratio of NPLs to total loans down from 39.8% in 2006 to 6.9% in 2007. The ratio increased to 8.9% in 2008, then jumped to 18.8% in 2011. The ratio dropped to 5.6% in 2012, 3.3% in 2013, and 2.6% as of June 2014 because of the huge increase in the size of SMC’s loan portfolio. SMC’s NPL to total loan ratio of 3.33% in December 2013 was lower than the average of 4.8% for the seven SFIs. SMC’s NPL ratio has stayed low,slipping to 2.6% as of June 2014, below the average NPL level of 3.1% for all 16 universal banks. SMC’s ability to control the quality of the newly acquired loans has yet to be proved.
SMC’s profitability has improved since 2008. SMC reported a Bt22 million net profit in 2008 after three consecutive yearly losses, and then reported a Bt26 million in net profit in 2009. In 2010, net profit was only Bt0.3 million, due to a decline in operating income and an increase in the allowance for bad debts and doubtful accounts. The increase in the allowance was required in order to bring SMC into compliance with International Accounting Standard 39 (IAS39). In 2011, net profit recovered to Bt4 million, and increased to Bt9.9 million in 2012 as the loan portfolio grew and the expenses for bad debt and doubtful accounts fell significantly. Net profit rose 66% to Bt26 million in 2013. In the first half of 2014, net profit almost doubled to Bt46 million.
In the past, SMC’s core funding base depended on short-term promissory notes. After SMC recently issued senior unsecured debentures and mortgage-backed securities (MBS), they helped reduce the portion of funding from short-term promissory notes to 62% of its total funding as of June 2014. In the third quarter of 2014, SMC matched the duration of its loan portfolio by issuing Bt1,650 million in senior unsecured debentures and issuing Bt3,200 million in MBS.
SMC is fulfilling its mission to develop the secondary mortgage market. From 2002 until present, SMC has issued seven tranches of MBS and asset-backed securities (ABS), worth in total Bt6,614 million. The issuances increased the number and type of alternative securities, such as MBS, available to investors. Lastly, the issuances reduced the current mismatch in the structure of SMC’s assets and liabilities. The proceeds from the issuance of Bt1,200 million in new debentures will be used to refinance SMC’s existing debt, purchase housing loans, and meet SMC’s working capital needs.
SMC utilized its capital base effectively as it expanded. Its BIS ratio declined from 77.7% in 2011 to 13.8% as of June 2014. The ratio of shareholders’ equity to total assets also decreased, sliding from 36.3% in 2011 to 5.7% in the first half of 2014. TRIS Rating expects SMC will maintain enough capital to absorb any future losses from any adverse changes in the industry.
Secondary Mortgage Corporation (SMC)
Company Rating: AA-
Issue Ratings:
SMCT156A: Bt1,500 million senior unsecured debentures due 2015 AA-
SMCT166A: Bt827 million senior unsecured debentures due 2016 AA-
SMCT168A: Bt650 million senior unsecured debentures due 2016 AA-
SMCT179A: Bt1,000 million senior unsecured debentures due 2017 AA-
Up to Bt.1,200 million senior unsecured debentures due within 2017 AA-
Rating Outlook: Stable