TRIS Rating Affirms Company & Senior Unsecured Debt Ratings and Outlook of “TCAP” at “A+/Stable”

TRIS Rating has affirmed the company rating of Thanachart Capital PLC (TCAP) and the ratings of TCAP’s existing senior unsecured debentures at “A+”. The outlook remains “stable”. The ratings are based on TCAP’s position as the investment holding company of the Thanachart Group, its management control through a 50.96% ownership stake of Thanachart Bank PLC (TBANK), the core bank subsidiary, and the stable stream of dividends from TBANK. The ratings take into consideration TBANK’s strong franchise in auto hire-purchase lending and the support TBANK receives from its Canadian strategic partner, Bank of Nova Scotia (BNS), which holds a 49% stake in TBANK through Scotia Netherlands Holdings B.V. However, the ratings are partially offset by TCAP’s weak asset quality, relatively low but rising reserves for loan losses, and the current slowdown in the Thai economy. 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 competitive positions in its core lines of business. The strong support and business know-how received from the major shareholders, TCAP and BNS, will 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 (AA-). 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 barrier which may affect TBANK’s ability to pay dividends.

Based on consolidated asset size as of June 2014, TCAP was ranked sixth among all 16 Thai commercial banks, with a 7.6% market share in loans and a 6.9% market share in deposits. In terms of revenues, the banking segment contributed approximately 80% of the consolidated net operating income of TCAP. The remainder was from the operations of other segments, such as leasing, securities, fund management, and distressed asset management.

TBANK has granted new loans more prudently because the Thai economy has slowed down and auto sales remain sluggish. As a consequence, TCAP’s consolidated loans expanded only by 5% in 2013, compared with 19% in 2012. As of June 2014, TCAP’s loans and receivables amounted to Bt784.1 billion, contracting by 1% from the December 2013 level. TCAP’s risk profile is still hurt by a high level of non-performing assets (NPA; the sum of non-performing loans (NPLs), plus restructured loans and foreclosed property). Some of the NPAs came to TBANK when it bought Siam City Bank PLC’s (SCIB) loan portfolio. NPLs declined in 2012, but rebounded in 2013 through the first half of 2014 as the economy worsened. At the end of June 2014, the consolidated amount of NPLs totaled Bt38.4 billion, rising from Bt34.3 billion in 2012. The ratio of NPLs to total loans climbed from 4.5% in 2012 to 4.9% in June 2014. In 2013, TBANK set aside additional provisions for loan losses so as to strengthen its cushion of reserves. However, TBANK’s excess reserves for loan losses remain lower than its peers. TCAP’s NPL coverage ratio (loan loss reserves as a percentage of NPLs) was 84%, far lower than the industry average. TCAP faces a continuing challenge to control its NPLs and to add its cushion of reserves for loan losses.

TCAP’s financial performance has improved after the smooth post-merger integration of TBANK and SCIB. Net interest income and non-interest income has increased, while operating costs have been under control. However, TCAP’s credit cost rose as its loan quality deteriorated. In 2013, TCAP delivered net income of Bt17.0 billion, up by 73% year-on-year (y-o-y). The sharp rise in net profit was largely due to the net effect from two extraordinary gains by TBANK: a one-time gain from divesting the life insurance segment, and extra provisions for loan losses. Despite the improvements in its financial performance, TCAP’s profitability remains relatively weak compared with its peers. TCAP’s return on average assets (ROAA), excluding the extraordinary items, remained lower than the industry average.

TCAP has a sufficient capital base to support its expansion efforts over the next few years. As of June 2014, the company reported a Tier-1 capital ratio (on a fully consolidated basis) of 8.88% and a total capital ratio of 13.66%. These two ratios were above the minimum requirements of 6.00% and 8.50% set by the Bank of Thailand (BOT).

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