TRIS Rating has affirmed the company rating of Land and Houses Bank PLC (LH BANK), a wholly-owned subsidiary of LH Financial Group PLC (LHFG), at “A-” with “stable” outlook. The rating reflects LH BANK’s continual improvements in its business and financial profiles after upgrading its status to become a universal bank. The rating takes into consideration the increased broadening and diversification of LH BANK’s loan portfolio, the good quality of its loan portfolio, strong base of capital funds, as well as the business and financial support LH BANK receives from LHFG’s major shareholders. However, the rating is constrained by the bank’s small market shares in loans and deposits, concentrated revenue sources, and relatively weak profitability. The current uncertainty from the slowdown in the Thai economy might affect asset quality as well as the profitability of the bank. The “stable” outlook reflects the expectation that LH BANK will prudently expand its loan portfolio and stabilize earnings in the medium term. The outlook is also based on LH BANK’s ability to keep the quality of the loan portfolio from deteriorating further, its ability to sufficiently maintain the capital buffer to absorb any unexpected losses, and its ability to secure stable sources of funding at reasonable prices.
LH BANK started operation as a retail bank in December 2005. The bank was permitted to widen its scope of business after it was granted a universal banking license in December 2011. LH BANK maintains its role as a core subsidiary of LHFG, the financial holding company of Land and Houses Group. LHFG’s major shareholders comprise Land & Houses PLC (LH, rated “A+” by TRIS Rating), Quality Houses PLC (QH, rated “A-”), and Ms. Piengjai Harnpanich, holding 34%, 21%, and 17%, respectively, as of April 2014. LH BANK gains synergistic benefits from its group of affiliated companies. The synergies help LH BANK enlarge its business and customer base. LH BANK is almost the smallest Thai commercial bank in terms of asset size. As of June 2014, LH BANK was ranked 14th among 16 Thai commercial banks, with a 1.0% market share in loans and a 1.1% share in deposits. LH BANK has added micro branches, strengthening its banking channel and building a foundation for future growth. The bank’s operating platform and systems have been continuously improved to enhance efficiency.
LH BANK’s loan portfolio has expanded rapidly, at a compound annual growth rate of 26% from 2009 to 2013. The growth came largely from increases in corporate lending as well as loans to small and medium-sized enterprises (SME). As of June 2014, LH BANK’s loan portfolio comprised corporate loans (51%), SME loans (19%), and retail loans (30%). After becoming a universal bank, LH BANK has focused more on corporate loans. A substantial rise in the value of large loans increased LH BANK’s exposure to loan concentration risk from the large borrowers. However, LH BANK became more prudent as it granted new loans amidst an uncertain economy. As of June 2014, loans and receivables had slightly increased to Bt108.6 billion, up by 5% from December 2013.
LH BANK’s asset quality remains relatively strong. However, the quality of loans has deteriorated after the bank accelerated its expansion. Loan delinquency rose, especially in the retail loan segment, because of the unfavorable Thai economy. The ratio of non-performing loans (NPLs) to total loans rose slightly, from 1.9% in 2012 to 2.0% at the end of June 2014, but remained below the industry average. LH BANK added to its excess reserves for loan losses to absorb any future deterioration in loan quality. As of June 2014, the bank’s loan loss reserves accounted for 150% of the minimum requirement set by the Bank of Thailand (BOT), up from 115% in 2012.
In 2013, LH BANK reported a net profit of Bt915 million, rising by 34% year-on-year (y-o-y). The bank’s improved performance was mainly driven by an increase in net interest income and non-interest income, together with control of operating costs. LH BANK’s credit cost increased, however, largely as a result of the increased NPLs as well as the bank’s plan to add to its surplus reserves. LH BANK’s profitability remains relatively low compared with its peers. Return on average assets (ROAA) is less than the industry average. In 2013, LH BANK’s interest spread improved slightly, but it was still the lowest in the industry. The bank’s interest spread is expected to improve further, should the bank attract more retail deposits after extending its branch network.
The liquidity and funding profiles of LH BANK are adequate. As of June 2014, LH BANK’s ratio of loans to deposits was 92%, well below the industry average. LH BANK plans to increase further the proportion of retail deposits to diversify and stabilize its funding base.
LH BANK’s capital buffer has declined, as the result of its rapid expansion of the loan portfolio. However, the capital base remains strong, and is sufficient to support the bank’s expansion efforts over the next three years. As of June 2014, LH BANK reported a Tier 1 ratio of 12.56% and a total capital ratio (BIS ratio) of 13.16%, above the minimum BOT requirements.