Bangkok--Mar 1--Fitch Ratings
Fitch Ratings (Thailand) has today affirmed National Finance Public Company Limited’s (“NFS”) National Long-term rating at ‘A-(tha)’ (A minus(tha)) with a Stable Outlook, National Short-term rating at ‘F2(tha)’ and Support rating at ‘5’. At the same time, the agency also affirmed NFS’s banking subsidiary - Thanachart Bank’s (“NBANK”) National Long-term rating of ‘A-(tha)’ (A minus(tha)) with a Stable Outlook, National Short-term rating at ‘F2(tha)’, Individual rating at ‘D’ and Support rating at ‘5’.
In 2005, NFS transferred its finance businesses to the bank, including some assets and liabilities excluding its investments, existing hire purchase receivables and debentures. In 2005, revenue from NFS’s operations still accounted for more than half of the group’s total revenue while that of NBANK made up just about 35%. However, over the full year of 2006, Fitch sees NBANK’s contribution to group revenues rising to over half.
The ratings of NFS reflect its strong capital, consumer finance niche and broad-based financial services business. The main risk to its performance is a high level of restructured loans, aggressive lending growth at the subsidiary level and rising interest rates which could see the group’s funding costs, asset quality and profitability weaken. While a group restructuring should produce a larger and more financially sound financial conglomerate, the transfer of NFS’s hire purchase business to NBANK will see NFS’s reliance on dividends from NBANK increase in the medium-term, as it is transformed into a holding company.
While NFS’s net income improved slightly in 2005 due to strong hire purchase growth and the release of loan loss reserves, pre-provisioning income fell 5.8% due mainly to margin pressure and higher operating expenses as a result of the group restructuring. Contributions from the group’s brokerage business and gains from investments also fell due to weaker capital market conditions. Hire purchase receivables make up more than 70% of the group’s lending portfolio. Given the fixed-rate nature of the receivables, the rising cost of funds resulted in a fall in NFS’s net interest margin from 3.28% in 2004 to 3.18% in 2005. Impaired loans increased to THB12 billion at end-September 2005 from THB8.5bn at end-2002, although impaired loans as a percentage of total loans fell to 8% from 11.3% over the same period as a result of loan growth. Loan loss reserve coverage fell to 64.7% of impaired loans at end-September 2005 from 70.2% at end-2004. At end-September 2005, NFS’s stand-alone Tier 1 capital amounted to THB11.7bn or 10.3% of risk weighted assets, up from THB9.8bn or 8.5% at end-2004 due to earnings growth and the asset transfer to NBANK. The size of NFS’s Tier I capital is appropriate for its small size and market volatility. On a consolidated basis, capital is stronger due to the capital invested in NBANK (deducted at the parent level).
The ratings of NBANK reflect the strength of the parent group, NFS, while the transfer of NFS’s finance business to NBANK (and the run-down of existing hire purchase loans at NFS) will result in NBANK becoming the main operating subsidiary of the group. NBANK’s profitability is currently constrained by related branch network expansion expenses, although the transfer of NFS’s banking and finance businesses to NBANK should strengthen its profitability, as well as its retail and deposit franchises over the long term. NBANK’s low level of reserves, high concentration and high growth strategy on auto hire purchase lending raises concerns about its asset quality amid rising interest rates and a weakening operating environment in the consumer finance market. NBANK is of limited systemic importance, even post-consolidation, with less than a 3% market share of deposits. Fitch believes that government support for NBANK, although possible, should not be relied upon.
Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(tha)’ for National ratings in Thailand. Specific letter grades are not therefore internationally comparable.
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Contact: Chaiyapat Paitoon, Sorasit Vanaprasert, Vincent Milton, Bangkok +662 655 4755. End.