TRIS Rating Assigns "A+/Stable" Rating to Senior Debt Worth Up to Bt1,400 Million of “TCAP”

TRIS Rating has assigned the rating of “A+” to the proposed issues of up to Bt1,400 million in senior debentures of Thanachart Capital PLC (TCAP). At the same time, TRIS Rating has affirmed the company rating of TCAP and the ratings of its existing senior debentures at “A+”. The outlook remains “stable”. The ratings reflect TCAP’s position as the investment holding company of Thanachart Group, management control of its core bank subsidiary -- Thanachart Bank PLC (TBANK) --through a 50.96% ownership stake, and the stable stream of dividends TCAP receives from TBANK. The ratings take into consideration TCAP’s capable and experienced management team, its improved risk management system, and its enhanced franchise value. The ratings also reflect the strong business support TCAP receives from its Canadian strategic partner, Bank of Nova Scotia (BNS), which holds a 49% stake in TBANK through Scotia Netherlands Holdings BV. However, these strengths are partially offset by TCAP’s weak asset quality, relatively low profitability, and a small cushion of reserves to protect against loan losses. The ratings are also pressured by intense competition in the banking, hire-purchase, and securities industries, as well as uncertainties in the global financial arena. These factors might limit the Group’s profitability and expansion opportunities in the future.

The “stable” outlook reflects the expectation that TBANK, as the major source of revenue for TCAP, will be able to leverage the synergies among TBANK and BNS to strengthen its market positions in its core lines of business. In addition, the strong financial support and business know-how from both strategic partners, BNS and TCAP, will sustainably enhance TBANK’s overall business and financial performance in the future.

TCAP’s company rating is one notch lower than the company rating of TBANK. The one notch difference reflects the structural subordination of TCAP’s obligations to those of TBANK, TCAP’s reliance on dividends from TBANK, and the supervisory barriers which may affect TBANK’s ability to pay dividends.

Based on consolidated asset size as of March 2013, TCAP was ranked 6th among all 15 Thai commercial banks, with 8.3% market share in loans and 7.2% market share in deposits. In 2012, TBANK and its subsidiaries contributed approximately 92% of the consolidated net operating income of TCAP. The remaining 8% was from the operations of TCAP and its two subsidiary companies which operate the distressed asset management business. TCAP’s financial performance has gradually improved after the smooth post-merger integration of TBANK and Siam City Bank PLC (SCIB). In 2012, consolidated net profits rose to Bt5.5 billion, up by 10% year-on-year (y-o-y). For the first quarter of 2013, TCAP delivered net income of Bt2.0 billion, up by 57% y-o-y. The improvements were mainly the result of increases in fee-based income and the efficient control of operating costs. Despite the recent improvements, TCAP’s profitability remains relatively weak compared with its peers. In 2012, return on average assets (ROAA) of 1.01% and return on average equity (ROAE) of 12.12% remained below the industry averages of 1.41% and 14.60%, respectively.

During the past few years, the risk management framework of TCAP has been developed and improved, in an effort to comply with international standards. However, TCAP’s business profile is still pressured by a high level of non-performing assets (NPAs; the sum of classified loans more than three months overdue, plus restructured loans and foreclosed property). TCAP has strived to resolve the legacy non-performing loans (NPLs), most of which were assumed when TBANK bought SCIB’s commercial loan portfolio. As a consequence of TCAP’s efforts, the amount of consolidated NPLs fell from Bt39.5 billion in 2010 to Bt33.0 billion at the end of March 2013. The ratio of NPLs to total loans fell to 4.27% but remained higher than the industry average of 2.97% for 11 Thai commercial banks (excluding four non-listed banks). TRIS Rating expects TCAP will be able to reduce further its NPLs so as to enhance its credit profile. In addition, TCAP’s cushion of capital funds and surplus reserves for loan losses is likely to be adequate to absorb the unexpected losses from deteriorating loans in the medium term.

TCAP’s capital base remains sufficient to support its growth plans in the medium term. As of December 2012, the company reported a Tier-1 capital ratio (on a fully consolidated basis) of 7.50% and a total capital ratio of 12.07%, down from 8.48% and 12.53% in 2011. Despite the decreases, these two ratios remain above the minimum requirements of 4.25% and 8.50% set by the Bank of Thailand.

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