TRIS Rating has assigned a company rating of “A-” to The Federation of Savings and Credit Cooperatives of Thailand Ltd. (FSCT) with “stable” outlook. The rating reflects FSCT’s important role in promoting and developing the savings cooperative movement in Thailand. The rating is also supported by FSCT’s status as the largest savings cooperative federation in terms of both asset size and number of members, its long track record, experienced and proficient management team and staff, improving financial performance, and the good quality of the loans FSCT has made to its members. The rating takes into consideration the legal privileges extended to primary savings cooperatives. The privileges buttress the quality of the loans made by savings cooperatives and enhance the competitive edge of savings cooperatives, including FSCT, over traditional financial institutions. However, the strengths are partially mitigated by FSCT’s relatively high leverage, a mismatch in assets and liabilities, and a looming regulatory change which may reduce the privileges currently enjoyed by savings cooperatives. The “stable” outlook reflects the expectation that FSCT will be able to maintain its important role in the savings cooperative movement in Thailand. In addition, FSCT’s internal funding base, provided by its members, is expected to be maintained. FSCT is expected to deliver solid operating performance, leading to satisfactory returns for its members. Any changes, such as a shift to more aggressive operating policies or any regulatory changes that reduce the privileges for savings cooperatives, might affect FSCT’s rating.
FSCT was established in 1972 at the initiative of the Cooperative League of Thailand (CLT). According to the Cooperatives Act, FSCT is a secondary savings cooperative. Primary savings cooperatives are members of FSCT. At primary savings cooperative, for example, personnel at a specific employer are the members of the primary savings cooperative. Currently, in terms of both asset size and number of members, FSCT is the largest of nine savings cooperative federations in Thailand. FSCT receives all the tax exemption privileges that all primary savings cooperatives enjoy, such as exemptions from corporate income tax, income tax on interest earned on deposits, and withholding tax on dividend payments.
FSCT started operation in 1973. The number of members has continuously increased, rising from 81 savings cooperatives at the date of establishment to 1,025 savings cooperatives at the end of fiscal year (FY) 2013, or 31 March 2014. The majority, or 76.7%, of all savings cooperatives in Thailand are members of FSCT. FSCT provides financial services for its members, including taking deposits and providing loans. In addition, FSCT plays an important role in the savings cooperatives movement at a national level. FSCT is involved in numerous activities to support, promote, plan for, and develop savings cooperatives in Thailand.
During the past five years, FSCT’s assets have doubled, jumping from around Bt30,000 million at the end of FY2008 to over Bt60,000 million at the end of FY2013. The substantial growth was financed mainly through commercial bank borrowings. However, FSCT’s cooperative members continue to provide the lion’s share of FSCT’s funding needs through paid-up shares, deposits, and borrowings through promissory notes (P/N).
Loans made to cooperative members were the largest portion (59.8%) of FSCT’s total assets at the end of FY2013. Loans to cooperative members ranged between 59%-66% of total assets during the past five years. About one-third (38.4%) of FSCT’s total assets was investments and the remainder (1.8%) was cash and other assets. FSCT has a policy to provide loans for its members and non-members, but loans will be provided to members first if there is a greater demand. At the end of FY2013, loans made to cooperative members amounted to Bt36,850 million. FSCT provided loans to only 263 cooperative members, out of a total of 1,025 members at the end of FY2013. As a result, FSCT is exposed to concentration risk from the loans it has made to cooperative members. The 20 largest loans made to cooperative members comprised 50.3% of total loans at the end of FY2009 but only 39.5% at the end of FY2013. Despite the drop, the current level is considered relatively high. However, FSCT’s loan concentration risk is mitigated by the high quality of its loan portfolio.
At the end of FY2013, FSCT had only Bt9 million of non-performing loans (NPLs), accounting for only 0.02% of outstanding loans. FSCT’s good loan quality stems from the automatic repayment mechanism which comes with each loan and the legal privileges provided to primary savings cooperatives. Loan repayments due from the members of primary savings cooperatives can be deducted from a member’s monthly salary. In addition, according to the cooperatives laws, savings cooperatives have a first priority claim over any other creditor. This repayment mechanism, plus the support built into the legal system, reduce the credit risk of loans made to primary savings cooperatives’ members. The security of the cash inflows from the loan repayments made to the primary savings cooperatives secures the ability of FSCT’s borrowers to repay their loans. In addition to the special loan repayment mechanism and other legal privileges, FSCT has also strict underwriting criteria and guidelines for the loans it grants. In 2013 a major credit union faulted because of a massive fraud. However, FSCT had no transactions with this cooperative.
According to the cooperatives laws, savings cooperatives are restricted to a limited set of permissible investments. The restrictions reduce the credit risk of FSCT’s investment portfolio. The ratio of FSCT’s investment portfolio to its total assets has risen continuously, climbing from 31.4% at the end of FY2010 to 38.4% at the end of FY2013. At the end of FY2013, corporate debentures made up 78.9% of FSCT’s investment portfolio, 14.4% was invested in government bonds and financial instruments of government-related entities, and the remaining 6.7% was invested in other securities such as equities and private funds. Nearly all (81.6%) of the investment portfolio at the end of FY2013 was considered to be long-term investments.
During the past few years, FSCT faced difficulties in raising funds through its members, both in terms of deposits and P/N. Deposits and P/N rose by only 1.6% in FY2011, 5.6% in FY2012, and 1.9% in FY2013, compared with annual rises of over 10% during FY2008-FY2010. FSCT has raised a substantial amount of funds through borrowings from commercial banks during the past five years. Borrowings climbed from Bt7,825 million at the end of FY2008 to Bt15,665 million at the end of FY2013, or 25% of total assets. All commercial bank borrowings were short-term borrowings. In TRIS Rating’s view, wholesale funding through financial institutions carries a higher rollover risk for FSCT than using deposits and borrowings from cooperative members as its sources of funding. A higher proportion of external short-term funding brings refinancing risk and liquidity risk for FSCT. The risk is especially high during times of adverse change in the savings cooperatives system or the economy. In addition, more short-term funding means FSCT has a wider negative maturity gap between its assets and liabilities. At the end of FY2013, approximately 30% of FSCT’s total assets were long-term assets, mostly long-term investments without any mechanism to adjust the interest rate. FSCT thus carries interest rate risk to a certain extent.
FSCT’s spread on its investment portfolio dropped from 2% in FY2010 to 0.8% in FY2013. However, the loan spread widened from 0.2% in FY2010 to 1% in FY2013, pushing the overall spread from 0.8% in FY2010 to 1% in FY2013. The business of a savings cooperative is not as complicated as the business of a commercial bank. As a result, the ratio of operating expenses to total income is relatively low. FSCT’s operating expenses remained low and controllable, at around 5% of total income, during the past three fiscal years. The rise in the overall spread boosted profitability. Net profit rose from Bt543 million in FY2010, to Bt713 million in FY2011, and to Bt748 million in FY2012. Net profit improved substantially to Bt913 million in FY2013. The ratio of return on average assets (ROAA) improved from 1.1% in FY2010 to 1.5% in FY2013, while the ratio of return on average cooperative’s equity (ROAE) improved from 5.8% in FY2010 to 7.3% in FY2013. FSCT raised the dividend yield for its cooperative members from 5.2% in FY2010 to 5.6% in FY2013.
FSCT’s paid-up share capital has increased continuously. As required by FSCT’s by-laws, cooperative members need to purchase additional shares in proportion to the paid-up share capital they own. In a normal situation, FSCT’s paid-up share capital is expected to increase continuously as the paid-up share capital of each cooperative member will increase automatically, thanks to the traditional mechanism of monthly share purchases by members. FSCT’s paid-up share capital rose substantially from Bt6,257 million in FY2009 to Bt9,211 million in FY2010, due to an extra share purchase made by one cooperative member in FY2010. After the extra share purchase, FSCT’s paid-up share capital increased by 2%-6% per year during FY2011-FY2013. FSCT’s paid-up share capital was Bt10,283 million at the end of FY2013. Cooperative’s equity, including paid-up share capital, legal reserves, reserves mandated by its by-laws, unrealized gains or losses from its investments, and net profit, has also increased steadily. Cooperative’s equity rose from Bt7,708 million at the end of FY2009 to Bt12,805 million at the end of FY2013. FSCT’s ratio of cooperative’s equity to total assets has held at around 20% during the past eight years. However, this ratio is considered low. Other large, long-established savings cooperatives have a ratio of around 40%.
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