Bangkok--14 Dec--TRIS Rating
TRIS Rating has affirmed the company rating of Thanachart Bank PLC (TBANK) at “AA-” and has affirmed the ratings of TBANK’s senior debentures, subordinated debentures, and hybrid debt capital securities at “AA-”, “A+”, and “A”, respectively. The outlook remains “stable”. The ratings reflect TBANK’s experienced management team which has a proven ability to manage TBANK’s core line of business, hire-purchase lending. The ratings take into account TBANK’s strengthened business profile, with a larger and more diversified client base, an enlarged network, and the appropriate business strategies to strengthen the synergies within Thanachart Group. The ratings are also enhanced by the strong credit profile of its Canadian strategic partner, Bank of Nova Scotia (BNS), which holds a 49% stake in TBANK through Scotia Netherlands Holdings BV. These strengths, however, are constrained by relatively high level of legacy non-performing assets (NPAs) and more intense competition in the banking industry, as well as uncertainties in the domestic political situation and the worldwide financial arena which might limit the Group’s expansion plans and future profitability
The “A” ratings for TBANK’s hybrid debt capital securities (TBANK197A and TBANK247A) reflect both the subordination and payment deferral risks of the issues. The hybrid debt capital securities are cumulative, junior subordinated, unsecured, and due in 2019 and 2024. The securities are also callable by the bank any time before the maturity dates as long as 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 hybrid debt capital securities will be subordinated to depositors and holders of the senior debts and subordinated debts of the bank. The bank will not be obliged to make an interest payment on the hybrid debt capital securities if two conditions are met: if the bank posts a net loss for the six-month period preceding an interest payment due date, and if the bank is unable to pay a dividend during the six months preceding an interest payment due date. However, the coupon interest payments for the hybrid securities are cumulative.
The “stable” outlook recognizes TBANK’s designated role as the core bank of the Thanachart Group. TBANK is expected to capitalize on group-wide synergies to strengthen its market position in the banking industry, and to control any deterioration in the quality of its assets. TBANK’s ratings will benefit if the bank can show sustainable revenue growth, the resolution of underperforming assets, and efficient cost control through group-wide synergies.
In November 2012, TBANK signed a share purchase agreement to sell 100% of Thanachart Life Assurance Co., Ltd. (TLIFE), its subsidiary, to Prudential Life Assurance (Thailand) PLC (PLA), for approximately Bt17.5 billion. If PLA receives regulatory approval, the transfer of all the shares and the transaction settlement are expected to happen in the first quarter of 2013. For the first half of 2012, TLIFE’s net profit comprised approximately 21% of the consolidated net profit of TBANK. The proceeds from the sale of TLIFE will be used to fund TBANK’s normal business operations, that is, expand its loan portfolio. The transaction will also increase TBANK’s capital base, as it will record a one-time gain from the sale. Additionally, TBANK is likely to benefit because it will become a business partner of PLA in bancassurance services. TBANK’s total revenue will decline after it sells TLIFE. However, interest income and fee-based income will rise and offset the loss of revenue caused by divestiture.
At the end of September 2012, TBANK was the sixth-largest Thai commercial bank as measured by asset size, with 8.0% market share in loans and 7.2% share in deposits. TBANK is the largest auto loan provider in Thailand, with around 27% market share and Bt360.9 billion in loans as of September 2012, including the hire-purchase portfolio of Thanachart Capital PLC (TCAP), its parent company. After it merged with Siam City Bank PLC (SCIB), TBANK’s competitive edge has been strengthened, particularly in the corporate banking segment. TBANK’s loan portfolio has become more diversified across other industrial sectors. The diversification has yielded a better loan mix and has reduced the concentration of hire-purchase loans in the loan portfolio. As of September 2012, TBANK’s corporate and small- and medium- sized enterprise (SME) loans represented 35% of total loans, up from 22% in 2009. Retail loans were 65% of the portfolio as of September 2012, down from 78% in 2009. The merger with SCIB also enlarged TBANK’s deposit customer base and the physical branch network. The larger deposit base and branch network will help support and enhance the extent of cross-selling the wide range of financial services offered by Thanachart Group. However, TBANK’s ability to benefit from these group-wide synergies remains to be proved.
TBANK’s performance dropped in 2011 and the first nine months of 2012. However, its performance was still in line with TRIS Rating’s projection for the post-acquisition business integration period. Net profit fell to Bt7.7 billion in 2011, down by 12.6% year-on-year (y-o-y). Return on average assets (ROAA) and return on average equity (ROAE) in 2011 were 0.87% and 10.37%, respectively, down from 1.34% and 17.51% in 2010. For the first nine months of 2012, TBANK reported net profit of Bt5.9 billion, down by 7.7% y-o-y. Non-annualized ROAA and ROAE were 0.65% and 7.63%, respectively, lower than the levels 0.74% and 8.86% attained in the same period of 2011, and also below the industry averages of 1.10% and 11.67% for 11 Thai commercial banks (excluding four non-listed banks). The falls were caused primarily by lower net interest income and increasing operating costs. TBANK’s interest spread has been squeezed, tumbling from 3.38% in 2010, to 2.52% in 2011, and 1.67% (non-annualized) for the first nine months of 2012. Despite lower net interest income and higher operating costs, fee-based income rose slightly, climbing by 5%-6% y-o-y in 2011 and the first nine months of 2012. Once the post-merger integration process is completed, we expect TBANK to show an improved financial profile in the medium term.
In terms of asset quality, TBANK has been constrained by relatively high levels of non-performing loans (NPLs) and NPAs (the sum of classified loans more than three months overdue, plus restructured loans and foreclosed property). The NPLs and NPAs mostly came from the purchase of SCIB’s commercial loan portfolio. TBANK has strived to improve the asset quality by resolving its legacy NPLs. At the end of September 2012, the ratio of NPLs to total loans was 4.89%, an improvement from 6.06% in 2010 and 5.92% in 2011. However, TBANK’s ratio remained above the industry average of 3.27% as of September 2012. The management team’s ability to control asset quality during the post-merger consolidation period remains a challenge.
TBANK has more diverse sources of funding after the acquisition and the sources of funding better match the bank’s asset and liability structure. The bank’s regulatory capital funds remain enough to support its growth in the medium term. As of September 2012, the Tier-1 capital ratio and capital adequacy ratio were 9.11% and 14.65%, respectively. Despite being above the minimum requirements of 4.25% and 8.50% set by the Bank of Thailand (BOT), TBANK’s ratios remained below the industry averages of 10.81% and 15.58%. Furthermore, TBANK had a relatively lower level of capital funds and allowances for doubtful accounts, which can serve as a cushion against bad debts. As of September 2012, TBANK’s NPAs were 0.62 times the amount of capital funds plus the allowance for doubtful accounts. This value is higher than the industry average of 0.44 times.
Thanachart Bank PLC (TBANK)
Company Rating: AA-
Issue Ratings:
Up to Bt5,500 million senior debentures due within 2013:
TBANK133A: Bt2,072.1 million senior debentures due 2013 AA-
TBANK155A: Bt5,000 million subordinated debentures due 2015 A+
TBANK194A: Bt2,000 million subordinated debentures due 2019 A+
TBANK196A: Bt10,000 million subordinated debentures due 2019 A+
TBANK204A: Bt6,000 million subordinated debentures due 2020 A+
TBANK227A: Bt8,497 million subordinated debentures due 2022 A+
TBANK22OA: Bt4,018.5 million subordinated debentures due 2022 A+
TBANK197A: Bt3,500 million hybrid debt capital securities due 2019 A
TBANK247A: Bt1,500 million hybrid debt capital securities due 2024 A
Rating Outlook: Stable