TRIS Rating has assigned a rating of “A” to the proposed issue of up to Bt70,000 million in senior unsecured debentures of TISCO Bank PLC (TISCOB). At the same time, TRIS Rating has affirmed the company rating and the ratings of the outstanding senior unsecured debentures of TISCOB at “A”, and has affirmed the ratings of the bank’s subordinated debentures and hybrid Tier 2 capital securities at “A-” and “BBB+”, respectively. The outlook remains “stable”. The ratings reflect TISCOB’s strong competitive position in auto hire-purchase lending and its strengthened base of capital funds. However, the ratings are constrained by the bank’s small market share in loans and deposits, its limited branch network, deteriorated loan quality, and its reliance on wholesale funding. In addition, the current slowdown in the Thai economy and the sluggishness of domestic auto sales may affect the bank’s competitiveness, the quality of its loan portfolio, and profitability.
The “BBB+” rating for TISCOB’s hybrid Tier 2 capital securities (TISCO223A) reflects the subordination risk of the securities and the nonpayment risk of the securities, as defined by the non-viability loss absorption clause in the bond indenture. The features of the securities comply with the Basel III guidelines and the securities are qualified as Tier 2 capital under the Bank of Thailand (BOT)’s criteria. The securities are subordinated, unsecured, non-deferrable, and non-convertible. The securities are also callable by TISCOB prior to the maturity date, if the call date is at least five years after issuance and as long as the bank has received approval from the BOT. The holders of the securities are subordinated to TISCOB’s depositors and holders of TISCOB’s senior unsecured debentures. The principal of the securities can be written down in the event that the regulator deems the bank to be non-viable and decides to provide financial support to the bank, in accordance with the non-viability clause.
The “stable” outlook reflects the expectation that TISCOB will sustain its strong competitive position in auto hire-purchase lending and maintain a strong base of capital funds. The ratings could be downgraded if TISCOB’s profitability weakens substantially, caused by a drop in the quality of its loan portfolio. Any credit upside is unlikely in the near term due to the limited prospects for the hire-purchase segment and the weak economy.
TISCOB is a core bank subsidiary of TISCO Financial Group PLC (TISCO) through a 99.99% ownership stake. TISCO was ranked 10th among 19 Thai commercial banks in terms of asset size at the end of 2015, with a 2.1% market share in loans and a 1.4% share in deposits. Given its strategic focus on a niche market, auto loans are TISCOB’s largest loan portfolio, accounting for around 64% of total loans. The expertise of its management team has enabled TISCOB to maintain its market position in auto hire-purchase lending. TISCOB was the fourth-largest of 16 auto loan providers in TRIS Rating’s database, with approximately 10% market share as of December 2014.
TISCOB’s loan portfolio continues to contract as the economy slows and domestic auto sales remain sluggish. At the end of March 2016, TISCOB’s loans and receivables totaled Bt229.8 billion, a 2.1% decrease from the balance of outstanding loans in December 2015. After a continual deterioration over 2013-2015, TISCOB’s loan quality has improved slightly, as illustrated by a drop in the formation rate of non-performing loans (NPLs) in the first quarter of 2016. As of March 2016, NPLs decreased to Bt6.4 billion, giving an NPL ratio (NPLs as a percentage of total loans) of 2.80%. Since 2010, the excess reserves for loan losses have declined. At the end of March 2016, TISCOB’s loan loss reserves, as a percentage of the BOT minimum requirement, was 139%, compared with 260% at the end of 2010. TISCOB’s ratio is now below the industry average.
Despite its efforts to diversify across a wider range of industry segments, TISCOB still faces loan concentration risks because of its strategic focus on auto loans. In addition, TISCOB has a few very large borrowers. The bank’s asset quality and capital buffer may deteriorate should the loans made to the large borrowers become troubled loans.
In the first quarter of 2016, TISCOB reported net income of Bt980 million, up by 19% year-on-year (y-o-y). The improvement in performance was caused mainly by increases in net interest income and net fee income. The interest spread rose because TISCOB can reduce its cost of funds, following a drop in the market interest rate. The bank’s funding cost, however, remained higher than the industry average. Provision for doubtful debts rose because TISCOB added to its excess reserves so as to strengthen the cushion for loan losses. Nonetheless, the relatively high funding cost and credit cost were mitigated by TISCOB’s efficient control of operating costs.
TISCOB’s capital base has strengthened after a recent addition of new capital funds. The bank’s regulatory capital is adequate to fund its expansion efforts over the next few years. As of March 2016, TISCOB reported a Tier 1 ratio and a total capital ratio (BIS ratio) of 13.98% and 17.98%, respectively, above the minimum requirements set by the BOT.
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