TRIS Rating has upgraded the company and senior debenture ratings of Secondary Mortgage Corporation (SMC) to ?AA-? from ?A+? with ?stable? outlook. The ratings reflect the continual improvement in SMC?s stand-alone business and financial profile and the strong support SMC receives from the government. SMC is a special financial institution (SFI), 100% owned by the Ministry of Finance (MOF), with a mission to promote the Thai secondary mortgage market. SMC has a competitive advantage from the special legal and regulatory support it receives, plus the tax privileges granted to SMC under the Emergency Decree on Secondary Mortgage Finance Corporation B.E. 2540 (the SMC Act). The government has also shown its support by injecting funds into SMC for the budget year. For the stand-alone rating, SMC has had good prospect after its successful cooperation with the leading commercial banks. Its loans portfolio tripled in value since the end of last year. SMC has been profitable for five years despite having volatile earnings. However, the stand-alone rating is constrained for several reasons: a continued increase in the loans portfolio, deteriorating asset quality, and changing competitive environment in the primary markets. The ?stable? outlook reflects the medium-term expectation that the SMC?s management team will be able to improve operating efficiency and control asset quality, as well as to build a sizable portfolio by acquiring loans from its allied financial institutions as planned. The outlook also reflects the expectation that SMC?s relations with the government and related state entities, along with the business and financial support it receives from the government, remain unchanged in the future.
SMC was incorporated in 1997, under the SMC Act, with initial capital of Bt1,000 million. Under the Act, the government can guarantee the debt issued by SMC. However, the guarantee cannot exceed 4 times SMC?s capital. In January 2009, the MOF injected Bt100 million of new capital into SMC. The MOF recently approved an addition Bt130 million injection of new capital for the 2014 budget year. The new capital will enable SMC to acquire from Bt27,000 million to Bt31,000 million in mortgage loans port. SMC?s board of directors comprises the representatives from both the private sector and various governmental entities, including the Fiscal Policy Office, the Bank of Thailand (BOT), the Securities and Exchange Commission (SEC), the Government Housing Bank (GHB), and the Land Department, together with no more than four qualified directors plus SMC?s managing director (MD). The composition of its board has been well-designed to support its mission.
SMC was established to create a secondary mortgage market and make long-term fixed rate mortgage loans available to home owners. About 80% of SMC existing portfolios were mortgage loans acquired from financial institutions. The financial institutions provide mortgage financing services in the primary markets, and SMC then pools the mortgage loans to issue mortgage-backed securities, and sells the securities to investors.
SMC now has better growth prospects after it fulfilled many of its strategic objectives. For example, SMC expanded its cooperation with many financial institutions. The allied financial institutions sold more loans to SMC. During 2009 and 2012, SMC allied with some financial institutions to purchase mortgage loans. This business channel originated new loans worth Bt152 million as of December 2010 and Bt392 million as of December 2011. In 2012, SMC purchased housing loans from its allied financial institutions, totaling Bt3,256 million. SMC also plans to have some cooperative efforts with other financial institutions. As a result of the cooperative efforts, the value of SMC?s loan portfolio significantly increased. The value rose from Bt1,732 million in 2011 to Bt4,756 million in 2012, and Bt4,599 million at the end of June 2013.
SMC faces a challenge to control asset quality. Due to a rise in non-performing loans or NPLs, SMC posted a loss of Bt329 million in 2007, following annual losses of Bt99 million in 2006 and Bt120 million in 2005. SMC wrote off Bt318 million in bad loans in 2007, which pushed the ratio of NPLs to total loans down from 39.79% in 2006 to 6.90% in 2007. The ratio increased to 8.94% in 2008, then jumped to 18.84% in 2011. In 2012, the ratio dropped to 5.57% due to a big jump in the size of the loan portfolio. The ratio slightly increased to 6.32% as of June 2013. This level was still higher than the average NPL level of 3.01% for all 15 universal banks in 2012, and an average of 4.81% for the seven SFIs in 2012. Of SMC?s NPLs, 71% were loans acquired before 2008, while 29% of the bad loans were acquired in 2009 through 2012. However, TRIS Rating is concerned most about the quality of loans acquired in 2009 through 2012, when SMC?s loan portfolio increased substantially. This might limit SMC?s business expansion and profitability in the future.
In 2008, SMC reported a Bt22 million net profit after three consecutive yearly losses. SMC then reported Bt26 million in net profit in 2009. In 2010, net profit was only Bt0.3 million, due to a decline in operating income and an increase in the allowance for bad debts and doubtful accounts. The increase in the allowance was required in order to bring SMC into compliance with International Accounting Standard 39 (IAS39). In 2011, net profit recovered to Bt4 million, and increased to Bt9.9 million in 2012 as the loan portfolio grew and the expenses for bad debt and doubtful accounts fell significantly. For the first half of 2013, net profit was Bt18million. All of the profit was due to recurring interest income from its loans portfolio.
A majority of SMC?s funding base is short-term promissory notes. Short-term promissory notes comprised 84% of SMC?s total funding as of June 2013. In July 2013, SMC issued Bt1,000 million in senior debenture, reducing its short-term promissory notes to 67% of total funding . In the fourth quarter of 2013, SMC plans to match the duration of its loan portfolio by issuing Bt2,000 million mortgage-backed securities (MBS). SMC has previously issued five tranches of MBS and asset-backed securities (ABS). The successful issuances of MBS and ABS will benefit SMC in three ways. The issuance will help SMC fulfill its mission to develop the secondary mortgage market. The issuance will also increase the number and type of alternative securities, such as MBS, available to investors. Lastly, the issuance will partly reduce the current mismatch in the structure of SMC?s assets and liabilities.
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