TRIS Rating Co., Ltd. has affirmed the company rating of Thanachart Bank PLC (TBANK)
at “A+” and has also affirmed the ratings of TBANK’s subordinated debentures and hybrid debt
capital securities at “A” and “A-”, respectively. The outlook remains “positive”. The
ratings reflect TBANK’s stronger business profile following the acquisition of Siam City
Bank PLC (SCIB), a medium-sized bank with a large and more diversified client base. The
ratings are enhanced by the capability and experience of TBANK’s management team in its core
business, hire purchase lending, and its enlarged network and appropriate business
strategies to strengthen the synergies within Thanachart Group. The ratings are also
enhanced by the strong credit profile of TBANK’s Canadian strategic partner, Bank of Nova
Scotia (BNS), which holds a 48.99% stake in TBANK. However, these strengths are constrained
by the bank’s higher level of consolidated legacy non-performing assets (NPA), transition
risk during the merger period of TBANK and SCIB, and a more intense competitive environment
in the banking business. Uncertainties in the domestic political and global financial arenas
might limit the group’s expansion plans and profitability during the next few years.
The ratings of 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 due in 2019 and 2024, and are cumulative, junior subordinated,
unsecured, and callable before maturity dates by the bank after five years under the
approval from BOT. The holders of hybrid debt capital securities will be subordinated to
depositors and holders of senior debts and subordinated debts of the bank. The bank will not
be obliged to make any payment in the event that the bank posts net losses for the same six-
month period during which any interest payment would be due or payable and the bank is
unable to pay dividend during such period or during the next six months, but coupon payment
will be cumulative.
The “positive” outlook recognizes TBANK’s designated role as the core bank of
Thanachart Group with an expectation that TBANK will be able to capitalize on group
synergies to strengthen its market position in the banking industry, and to control asset
quality deterioration as well as transition risk during the merger integration period.
Growth in interest and non-interest income as well as cost synergies across the group are
expected to help offset rises in operating expenses as the merger between TBANK and SCIB is
fully realized.
TRIS Rating reported that as a part of its growth strategy, TBANK acquired SCIB by
purchasing shares of SCIB from the Financial Institutions Development Fund (FIDF) and other
shareholders during the second quarter of 2010, accounting for 99.24%. At the end of
September 2010, TBANK became the fifth largest commercial bank (up from eighth in 2008) in
Thailand in terms of total assets with 9.3% market share in loans and 7.9% share in
deposits. On a consolidated basis, TBANK’s total assets were Bt836 billion, up by 93.1% from
Bt433 billion at the end of December 2009. The acquisition has strengthened TBANK’s
competitive edge in the corporate banking business and also diversified its loan portfolio
across other sectors, yielding a better loan mix and reducing hire purchase loan
concentration.
At the end of September 2010, TBANK’s loan portfolio was Bt582,234 million, up by
104.2% from Bt285,100 million at the end of December 2009. TBANK is the largest auto loan
provider in Thailand with 27% market share and Bt228,268 million in loans (including hire
purchase portfolio of Thanachart Capital PLC--TCAP). As of June 2010, TBANK’s corporate
loans accounted for 43% of total loans, up from 21% at the end of December 2009. Retail
loans accounted for 57% of total loans, down from 79% at the end of December 2009. The
majority of TBANK’s loan portfolio comprised retail loans, with 39% in hire purchase loans
and 13% in housing loans, as well as corporate loans, with 14% of loans outstanding lent to
the manufacturing and commerce sector and 11% to the utility and services sector.
TRIS Rating said about the liability side of TBANK that the bank benefited from
acquiring the large deposit base and the physical branch network of SCIB. The acquisition
will further support and enhance the extent of cross-selling across many related companies
in Thanachart Group that offer financial services and is expected to strengthen TBANK’s
franchise value in the medium to long term. However, TBANK’s success in utilizing the
benefits of group-wide synergy has yet to be proved.
TBANK’s financial profile has continuously improved. Net income was Bt4,056 million
in 2009, up by 117% from Bt1,870 million in 2008. The performance improvement continued in
the nine-month period of 2010, as net income was Bt6,720 million, up by 167.7% compared with
Bt2,510 million for the same period of the previous year. The improvement in financial
performance was driven from increases in both interest and non-interest income. In 2009,
return on average assets and return on average equity were 1% and 16.48%, respectively, up
from 0.55% and 8.83% in 2008. These ratios continued to improve for the nine-month period of
2010, compared with the same period last year, which were up to 1.06% and 13.64% (non-
annualized), respectively, from 0.66% and 10.62%.
In terms of asset quality after the acquisition of SCIB, TBANK has been constrained
by an increase in non-performing loans (NPL) and NPAs, mostly from the commercial loan
portfolio of SCIB. At the end of September 2010, on a consolidated basis, TBANK’s ratio of
NPLs to total loans was 6.39%, up from 3.04% as of December 2009. This was above the
industry average of 5.64% for 11 Thai universal banks. TBANK’s NPAs (classified loans with
more than three months overdue, outstanding amount of troubled debt being restructured, and
foreclosed property) as of September 2010 were 0.62 times capital funds plus allowance for
doubtful accounts, up from 0.31 times at the end of December 2009. This ratio rose close to
the industry average of 0.65 times for 11 Thai universal banks. Management’s ability to
control asset quality during the merger period has yet to be monitored.
After acquisition, TRIS Rating views that TBANK’s liquidity improved with more diversification into retail deposits. Equity to total assets ratio at the end of September 2010 climbed to 8.45% from 6.44% as of December 2009, as a result of a capital injection of Bt35,790 million by TCAP and BNS in April 2010. However, this ratio was below the industry average of 10.06% for 11 Thai universal banks. TBANK’s capital adequacy ratio improved to 14.69%, from 14.10% as of December 2009. This ratio is expected to fall slightly as goodwill has to be deducted from its Tier-1 capital once the business transfer of SCIB to the bank is complete in 2011.
Currently, TBANK is processing the merger integration plan and proceeding with a voluntary delisting of SCIB’s shares from the Stock Exchange of Thailand (SET). SCIB will continue to operate as a separate commercial bank until the entire business transfer process has been completed. SCIB has committed to return its license to the Bank of Thailand (BOT) by 31 December 2011. Going forward, TBANK’s ratings and outlook will be influenced by challenges facing its asset quality in relation to the levels of its capital and earnings, said TRIS Rating. -- End