Bangkok--7 Jul--TRIS Rating
TRIS Rating has assigned the rating of "A-" to the proposed issues of up to Bt500 million in senior unsecured debentures of CFG Services Co., Ltd. (CFGS). At the same time, TRIS Rating has affirmed the company and current senior unsecured debenture ratings of CFGS at "A-". The outlook remains "stable". The ratings reflect CFGS's strong brand name "Srisawad Ngern Tid Lor" in secured personal loans and brand name recognition among its target customers. The ratings also reflect its strong risk management systems, nationwide branch network, and diversified customer base. The company rating of CFGS is enhanced from its stand-alone rating to reflect the business and financial support as a wholly-owned subsidiary from its parent bank, Bank of Ayudhya PLC (BAY). However, its target group customer also constrains the ratings, as this group of customers is sensitive to changes in the economic conditions. In addition, CFGS needs time to demonstrate ability to handle its currently sizable loan portfolio.
The "stable" outlook is based on TRIS Rating's expectation that CFGS will be able to maintain its market position and continuously deliver satisfactory performance. Loan quality is expected to be maintained. Support from the parent bank will continue.
The ratings or outlook upsides are the case that CFGS proves the consistent strengthening in business track record while continuously delivers strong financial performance. The improvement in business profile is considered by the company's ability to control credit cost amidst a weak economy and improve its competitive position in the consumer finance industry. Higher strategic importance of CFGS to its parent bank is also a credit upside for the ratings.
The ratings or outlook could be revised downward should there be any factors which would significantly deteriorate CFGS's asset quality, competitive position, and support from the parent bank.
CFGS was established in 2006 by AIG Consumer Finance Group Inc. (AIGCFG) to purchase the rights on brand name of "Srisawad Ngern Tid Lor" from Srisawad International (1991) Co., Ltd. (SI). CFGS also acquired all of SI's assets, excluding loan receivables. In 2009, BAY acquired all of CFGS's shares from AIGCFG. CFGS is currently classified as a non-solo consolidated subsidiary, part of BAY's financial conglomerate. After becoming a subsidiary of BAY, CFGS has the ability to leverage funding from BAY to finance expansion in loan portfolio and have benefits on other aspects from a strong tie with BAY, including referral channel and core loan system. CFGS has continuously developed and implemented its operating systems, including risk management and information technology systems. The company has been closely supervised and monitored by its parent bank and is indirectly controlled by the Bank of Thailand (BOT) through the parent bank.
CFGS provides lending services for low-income customers, who have little or no formal income documentation, by using their vehicles, such as cars, pick-up trucks, commercial trucks, motorcycles, and tractors as collaterals. The company currently used the brand name "Srisawad Ngern Tid Lor", which is well-known among its target customers and all the companies offering financial products using vehicles to make secured personal loans. Quick turn-around time is a key strategy to attract customers. The risk inherent in its base of target customers is partly mitigated by the small sizes of loans that CFGS makes, plus its nationwide customer base. In addition, the risk is controlled by CFGS's stringent underwriting policies and loan monitoring process. CFGS sets a relatively low ratio of loan to value (LTV). The low LTV ratio helps mitigate the risk of losses from repossession. The company has expanded its customer base to include small- and medium-sized enterprises (SMEs). CFGS can gain economies of scale by making larger loans to the SMEs.
There is high demand for financial services from financially underserved clients. In addition, CFGS can draw on funding support from its parent bank. As a result, CFGS has been able to grow its loan portfolio strongly during the past few years. The loan portfolio grew from Bt1,673 million in 2009 to Bt13,555 million in 2014, or a compound annual growth rate (CAGR) of 52%. CFGS's operating systems are considered strong and are adequate to support its businesses. However, CFGS needs time to demonstrate its ability to handle its sizable loan portfolio and the ability to deliver impressive performance with acceptable loan quality.
The ratio of non-performing loans (or NPLs, loans with more than 90 days past due) to total loans fell from 1.8% at the end of 2011, the year of widespread flooding, to 0.6% at the end of 2012. The ratio was maintained at 0.7% at the end of 2013. The slowdown economy pushed the ratio up to 0.9% at the
end of 2014. Despite the rise, CFGS's NPL ratio was relatively low, particularly in light of CFGS's customers who typically carry high credit risk profiles. The company has maintained a conservative provisioning policy by setting the ratio of the allowance for loan losses against total loans at least 6.25%. This percentage is large enough to cover the current level of NPLs.
CFGS's interest yield has been affected by direct competition from peers, change in composition of pledged assets, and the expansion of the loan portfolio to include customers with stronger credit profiles. The interest yield fell from 28.2% in 2011 to 21.2% in 2014 while the funding costs ranged from 4.4%-5% over the same period. As a result, the interest spread dropped from 23.8% in 2011 to 16.6% in 2014. If CFGS can control its current quality of loan portfolio, interest spread is high enough to deliver outstanding financial performance. Net income rose continuously from Bt57 million in 2010 to Bt517 million in 2014. The return on average assets (ROAA) jumped from 1.9% in 2010 to 4.7% in 2013, even of a slight drop to 4.3% in 2014.
CGFS has good asset-liability management, under the control of its parent bank. The company has financial flexibility from the support it receives from BAY. CFGS is categorized as a subsidiary in the non-solo consolidation group. Firms in this group face a limitation in the financial support they can receive from a parent bank to a subsidiary. Despite this limitation, the maximum limit on the credit facility that BAY is able to provide to CFGS remains large enough to support CFGS's expansion efforts. The company has leveraged the financial support it receives from BAY since it became a subsidiary. After a recapitalization in 2009, CFGS's capital base has gradually increased due to its solid performance. However, the improvement was not enough to support the substantial growth in its loan portfolio. As a result, the ratio of shareholders' equity to total assets slipped from 29.1% in 2009 to 15% at the end of 2013. In May 2014, the company increased its paid-up capital by Bt1,800 million. The recapitalization strengthened the ratio of shareholders' equity to total assets to 24.9% at the end of June 2014. The ratio remained steadily high at 23.6% at the end of 2014. The continued financial support from BAY helps mitigate concerns over any deterioration in CFGS's capital ratio.
CFG Services Co., Ltd. (CFGS)
Company Rating: A-
Issue Ratings:
CFG15OA: Bt500 million senior unsecured debentures due 2015 A-
CFG166A: Bt1,000 million senior unsecured debentures due 2016 A-
CFG16DA: Bt400 million senior unsecured debentures due 2016 A-
CFG185A: Bt1,000 million senior unsecured debentures due 2018 A-
CFG18OA: Bt500 million senior unsecured debentures due 2018 A-
CFG19DA: Bt275 million senior unsecured debentures due 2019 A-
Up to Bt500 million senior unsecured debentures due within 2017 A-