The Coronavirus (COVID-19) pandemic has had varying impacts on different types of non-bank financial institutions (NBFIs). Our rating actions on NBFIs in 2020 were mainly the result of a deterioration in operating performance over recent years or a material change in shareholding structure, rather than as a direct impact of COVID-19. While we do not expect the second wave of COVID-19 infections to have a significant immediate impact on rated NBFIs, it has added uncertainty to the recovery prospects of the Thai economy which could have implications on the revenue and loan asset quality of NBFIs.
Mixed impacts, but overall on the path to recovery
NBFIs have managed to get through the tight liquidity period in 2020, thanks to their well-managed debt repayment profiles. Our concerns over a potential liquidity squeeze for NBFIs due to the debt relief measures introduced by the Bank of Thailand (BoT) were alleviated by the soft loans provided by the Government Savings Bank (GSB, ?AAA/Stable?). The impacts from COVID-19 on NBFIs? business volume, revenues and asset quality have varied among different segments and deviated from our earlier expectations. Nonetheless, the strong risk-adjusted capital (RAC) and prudent business strategies of NBFIs have helped support their credit profiles to a large extent.
In 2021, we expect auto title loans and auto leasing to lead the industry in terms of credit growth and revenue improvement, supported by loan demand for auto title loans and a recovery in car sales for auto leasing. At the same time, we expect credit card spending to rebound in the second half of 2021, while motorcycle leasing may still face challenges of high NPLs, particularly for smaller lenders, and weak loan demand. We believe credit cost should decline for most NBFIs, leading to improved earnings, given the increased provisions last year, particularly for credit card lenders and motorcycle leasing operators. The extension of debt relief measures for retail borrowers should help contain deterioration of asset quality for NBFIs in 2021.
2020 rating actions were mixed
The rating actions by TRIS Rating on NBFIs in 2020 are shown in Fig. 2 below. Almost all the rating actions were driven by the issuer?s own operating performance or a material change in shareholding structure. The outlook revisions, on the other hand, were mixed. The change to ?negative? outlook from ?stable? was mostly driven by a material deterioration in credit profile or performance. The rationale for an upward outlook revision varied. For a complete list of TRIS Rating?s NBFI coverage, see Appendix A.
Better-than-expected performance in 2020
NBFIs? 9M20 financial results were stronger than TRIS Rating?s 2020F estimates for most segments (Fig. 3), despite the impacts from the city lockdown in 2020. For 9M20, auto title loan operators turned out to be the best performers (Fig. 4), with less impacts from COVID-19 compared to other lenders.
? Title loans
Singer Thailand PLC (SINGER, ?BBB-/Stable?) reported 157% growth in bottom line given is profit turnaround in recent years due to 37% higher revenues from strong product sales as well as increased interest income from hire purchase (HP) instalments and title loans for commercial vehicles. Its continuous financial improvement has led us to revise the credit outlook on SINGER to ?stable? from ?negative?. The major players in this segment, Muang Thai Capital (MTC) and SAWAD Corporation (SAWAD) (both rated ?BBB+/Stable?), also performed better than our expectations with 9M20 earnings higher by 24% and 25% y-y, respectively. Both companies reported mid-teen growth in revenues supported by relatively strong loan growth in line with their branch network expansions.
Most leasing companies reported lower revenues and earnings. For Mida Leasing (ML, ?BB+/Negative?), the lower loss on sales of repossessed cars played a major part in driving its earnings growth by 24% y-y. The rating downgrade on ML in 2020 was driven by the refinancing risk of its parent company, Mida Asset. For Ratchthani Leasing (THANI, ?A-/Stable?), higher provisions and flat revenue led to a drop in its bottom line by 7% y-y. Among all leasing companies rated by TRIS Rating, Eastern Commercial Leasing?s (ECL, ?BBB-/Negative?) performance deteriorated by the largest degree (-63% y-y) on account of significant increases in operating expenses and provisions, despite relatively stable revenue. We also revised the credit outlook on ECL to ?negative? from ?stable?.
? Motorcycle leasing
In the motorcycle leasing segment, Thitikorn (TK, ?A-/Negative?) has experienced a notable loan contraction since 2019 due to its cautious lending policies that focus more on preserving yields. Loan assets continued to decline by 28% year-to-date (YTD) pressured by weak domestic motorcycle sales. The rating outlook on TK was revised to ?negative? in 2020. In contrast, S11 Group (S11, ?BBB-/Stable?) recorded stable performance with 9M20 earnings flat y-y as healthy revenues helped compensate for the higher provisions.
? Credit card/Personal loan
We use Krungthai Card PLC (KTC, ?A+/Stable?) and Krungsriayudhya Card Co., Ltd. (KCC. ?AAA/Stable?) as our proxies in the credit card/personal loan (PL) segment. In 2020, KTC reported a slight contraction in earnings of 3% y-y as stronger interest income was compromised by a rise in loan loss provisions and a decrease in fee income, debt recovery income and gain on foreign exchange (due to the absence of overseas tourism). Despite a sharp decline in card spending during the city lockdown, its credit card loans expanded by 6% y-y, supported by new card acquisitions. All card issuers faced a significant drop in card spending during 2Q20-3Q20, which recovered in 4Q20 but remained below normal levels (Fig. 5).
? Operating lease
Operating lease companies have recorded mixed performance, with Krungthai Car Rent & Lease (KCAR, ?A-/Stable?) reporting modest earnings growth of 4% y-y in 9M20, helped by revenue from sales of expired cars. This is despite a contraction in operating lease assets due to low economic activities of SMEs. In contrast, Phatra Leasing?s (PL, ?BBB+/Stable?) net profit fell by 60% y-y. Even though PL expanded its financial lease assets, the revenue in 9M20 was not sufficient to offset the lower lease income from the shrinking operating lease portfolio and declining yields. PL?s rating was downgraded in 2020.
? DAMC?s debt collection and NPA sales disrupted
As for the distressed asset management companies (DAMC), the impact from COVID-19 in 2020 was notable for Bangkok Commercial Asset Management Company (BAM, ?A-/Stable?), which concentrates on secured assets. BAM?s 9M20 net profit declined by 77% y-y, mainly due to lower revenue and cash collection resulting partly from the debt relief programs and lower NPA sales. Moreover, the Legal Execution Department (LED) was closed in April-May 2020, hampering the company?s debt settlement process. Other DAMC that focus on unsecured assets, e.g., JMT Network Services (JMT, ?BBB/Stable?), reported strong earnings growth of 49% y-y in 9M20 as debt collection services were considerably less impacted by the city lockdown.
Credit Growth / Business Volume
Credit card and operating lease were negatively impacted
For NBFIs, the segments most impacted in terms of business volume in 2020 were unsecured consumer finance (credit cards/PL) and operating lease, but for different reasons. For credit cards, the notable development was the slump in credit card spending in 1Q20, which recovered to some extent after the city lockdown was lifted and the BoT announced relief measures for the retail segment (Appendix B). However, card spending was still below normal levels (Fig. 5). Nonetheless, KTC managed to grow its credit card loans by 6% y-y by end-2020. As for unsecured personal loans, banks scaled back their lending in 2Q20-3Q20 and resumed lending in 4Q20 (Fig. 6). Operating lease companies last year were also pressured by the absence of new contracts as SMEs, their target customers, faced economic challenges of their own.
Auto leasing and auto title loans ? mixed impacts
Outstanding auto leasing (HP) of major rated lenders declined modestly by 2% q-q to THB751 billion at the end of 2Q20 due to weak auto sales that fell by 51% y-y to 128,576 units in 2Q20. With auto sales volume recovering strongly in 4Q20, we expect auto leasing to also rebound (Fig. 7). Data from auto lenders in the banking sector already began showing a positive trend q-q in 4Q20. Auto title loans slowed down last year, specifically in 2Q20, but regained ground in 2H20, led by NBFIs (Fig. 8). From our survey of the NBFI lenders, so far there has been almost no impact from the second wave of COVID-19 in terms of new lending. Loan demand has largely recovered since 4Q20 after the end of the city lockdown.
Stable NPL ratio in the title loan segment
Auto title loans: The NPL ratio of auto title loans was relatively stable (Fig. 9). Only SAWAD reported a moderately higher NPL ratio, mainly due to TFRS 9 reclassification. The smaller companies, such as SINGER, reported a huge decline in the NPL ratio supported by strong portfolio expansion. Most of the retail customers in this segment are in the agricultural sector, which was largely unaffected by COVID-19. Moreover, regulatory forbearance also allows these lenders to freeze the status of loans under debt relief.
Auto leasing: On average, the NPL ratio increased moderately in this segment. The weighted average NPL ratio of auto lease operators rose to 4.4% at end-3Q20 from 3.5% at end-4Q19 due to portfolio contraction (Fig. 10). Among these, THANI and ECL reported a larger increase in their NPL ratios.
Credit card/PL loan: The weighted average NPL ratio of rated companies rose to about 2% from 1% (Fig. 11), mainly from KCC?s TFRS 9 reclassification and asset quality deterioration. The reduction of minimum payment helped alleviate asset quality pressure in 2020 and is likely to stabilize asset quality over the next few years.
Motorcycle leasing: Smaller lenders in this segment reported a steep rise in their NPL ratios, but overall the average ratio for the segment stabilized as a result of the low NPL ratio of Ayudhya Capital Auto Lease (AYCAL, ?AA+/Stable?) (Fig. 12). The increase in NPLs was driven mainly by TK?s asset quality deterioration, loan reclassification after TFRS 9, and a sharp portfolio contraction. S11 also reported a moderate rise in its NPL ratio, to 11.0% from 10.3% at end-2019, with slight loan expansion YTD.
For NBFIs, a smaller proportion of loans entered the debt moratorium program, compared with banks. The proportion of loans entering the debt moratorium ranged from 2% to 39% at the end of 2Q20, depending on the policy of each company. At the end of 2020, on average only 6% of auto title loans remained under the programs and 1% for the auto leasing segment (Fig. 13). From our survey, only a small percentage of total loans applied for phase 2 of the debt relief programs.
Credit cost increased in some segments
Among NBFIs, title loan and auto leasing operators? credit costs in the past year have generally been relatively stable as asset quality has been largely unaffected by COVID-19. Any increases in credit cost last year were more likely prompted by TFRS 9 adoption in 1Q20 than COVID-19 related, given that loan status has not been restaged during the debt relief program. For the motorcycle leasing and credit card segments, part of the loan book has been restaged due to COVID-19, but a larger portion was related to TFRS 9 and a change in accounting standards. The higher credit cost was more to do with conservative provisioning policy.
Funding and Liquidity
Fewer new bond issuances in 2020
Total new bond issues in 2020, banks and NBFI combined, fell by 55% y-y to THB126 billion. For NBFIs, new issuances declined to THB98 billion, a 28% drop from 2019, largely due to the business slowdown. However, new issuances picked up in 4Q20 as business volume rebounded (Fig. 17).
Bonds maturing in 2021 likely to be manageable
Bonds issued by FIs maturing in 2021 amount to THB162.7 billion, with THB47.9 billion maturing in 1Q21 (Fig. 18). Most of the bonds were issued by banks, consumer finance companies and leasing companies (Fig. 19). Despite the large volume of bonds maturing this year (Fig. 20), there should be fewer concerns as the bond market resumed normal activities in late 2020.
Capital and Leverage
Moderate to strong capital
The weighted average risk-adjusted capital (RAC) estimated by TRIS Rating reflects very strong capital for title loan and motorcycle leasing companies and a moderate capital level for the credit card and auto leasing segments (Fig. 21).
Leverage position at acceptable level
Although our revised NBFI rating methodology for lending NBFIs focuses more on RAC, we continue to monitor the debt-to-equity (DE) ratio as a measure of leverage. However, comparing DE ratios across segments may not be meaningful due to differing risk profiles. For most rated NBFIs, the DE ratio is at an acceptable level, in our view (Fig. 22). In 2021 we expect the DE ratio of NBFIs to decline as business expansion is likely to be gradual, and hence less need to raise funding.