Bangkok--7 Nov--Fitch Ratings
Fitch Ratings (Thailand) has today downgraded the National Long-term rating of AEON Thana Sinsap (Thailand) Plc (“AEONTS”) and unsubordinated unsecured bonds and bills to ‘BBB+(tha)’ from ‘A-(tha)’ (A minus (tha)). The rating Outlook has been revised to Stable from Negative. The agency also affirmed AEONTS’ National Short-term rating at ‘F2(tha)’.
The downgrade primarily reflects the significant rise in credit costs over the past two years as a result of an upward shift in delinquencies and lower margins due to regulatory caps and higher funding costs. However, the agency notes that the higher fee income has partly offset the impact on profitability to date. Its aggressive growth strategy, the increasing proportion of cash card and revolving cash loan products and a weakening operating environment are likely to lead to further pressures on asset quality and profitability given its focus on the sensitive low-income borrower segment. Moreover, AEONTS’ ability to continue to pass on rising credit costs via higher fees may be limited given the risk of further regulatory intervention and higher competition notwithstanding the expected slight increase in the credit card cap to 20%.
The rating Outlook is Stable given AEONTS’ niche market position, strong profitability, adequate capital and partial support from a strong foreign parent, although widespread flooding in Thailand could see further pressure on delinquencies in Q406. The key rating driver is AEONTS’ ability to strictly manage originations, delinquencies and collections to mitigate the risks from its high growth strategy and volatility in the sub-prime consumer finance segment. Management has indicated that AEONTS’ credit costs are expected to stabilise.
AEON Credit Service of Japan holds a 27.6% direct stake in AEONTS while other parent-related entities hold an additional c.36%. The remainder is publicly-held. Provided that the long-term business prospect in Thailand remains positive, the parent group’s support is possible but should not be relied upon.
AEONTS’ overall receivable growth remained high amidst the weakening economic and operating environment. While it reported strong profitability with net income rising 25% to THB980.5 million in FY05 from THB784.2m in FY04, rising credit and funding costs are likely to affect profitability in the next two years. Net income rose 11.2% year-on-year to THB532.8m in H106 from THB479.3m in H105 on the back of high growth in credit card and personal loan receivables and stringent cost control measures. To mitigate margin pressure from the regulatory cap and rising funding costs, AEONTS is shifting to higher-yielding higher-risk products.
AEONTS’ average lagged delinquency rate rose to 11.6% (or 8.9% if the securitised portfolios are included) in FY05 from 5.1% in FY00, before dropping slightly to 11.2% in H106 (or 8.9%). This was reflected in the sharp rise in credit costs or provisions as a percentage of total revenue to 28% in H106 from 23% in FY04 and 14% in FY00.
Total equity at end-August 2006 stood at THB3.6bn. AEONTS’ equity to receivables ratio of 17.6% appears adequate for AEONTS’ operations in a volatile sub-prime market, although capital may be affected by high dividend payments and receivables growth. Its debt/equity ratio improved slightly to 6.1x at end-H106 due to internal capital generation. Securitisation of hire purchase and credit card portfolios has helped improve liquidity and diversified funding sources.
Contacts: Sorasit Vanaprasert, Vincent Milton, Chaiyapat Paitoon, Bangkok +662 655 4755/59.
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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