Thanachart Bank Public Company Limited

Transcription

1 Contacts Datchanee Rojanapipat Raithiwa Naruemol Pornthep Wongsinwises Watana Tiranuchit, CFA Addresses N e w s f o r I n v e s t o r s Announcement No March 2009 Thanachart Bank Public Company Limited Company Rating: A+ Issue Ratings: Bt1,200 million bills of exchange due 2009 A+ TBANK155A: Bt5,000 million subordinated debentures due 2015 A Up to Bt2,000 million subordinated debentures due 2019 A Rating Outlook: Stable Rating History: Company Rating Issue Rating Secured Unsecured 4 Apr A+/Stable - A+, A 11 Aug A/Stable - A 14 Jul 2005 A/Stable - A Rating Rationale TRIS Rating maintains the ratings of Thanachart Bank PLC (TBANK) and its bills of exchange (B/E) at A+ and also affirms the rating of TBANK s subordinated debentures at A. At the same time, TRIS Rating assigns a A rating to TBANK s proposed issue of up to Bt2,000 million in subordinated debentures. The ratings reflect TBANK s strong business profile, supported by its management s capability and experience in core business, hire purchase, and its enlarged networks and appropriate business platform to strengthen Thanachart Group s business synergy. The ratings are also enhanced by TBANK s strong credit profile of its new strategic partner, Bank of Nova Scotia (BNS), Canada, with a 48.99% stake. However, these strengths are constrained by the unfavourable economy and banking business environment, uncertainty in the securities industry, and intensifying competition in the consumer finance industry, which might limit the group s business expansion and profitability. During 2005-, TBANK succeeded in establishing a physical branch network, ATM pools, and foreign exchange booths. Efficient utilization of its branch network has been gradually improved, resulting in further improvement in the group s market position, business diversification and financial performance in. In July, Thanachart Capital PLC (TCAP), the bank s parent company, entered into a joint venture agreement with BNS for investment in TBANK, which made changes in TBANK s shareholder structure. As of 3 February 2009, TBANK s shareholding stake was 50.92% held by TCAP and 48.99% held by BNS. TBANK s business profile and financial performance have been supported by its appropriate business platform and strategic assistant from BNS. TBANK is well equipped to succeed in the auto hire purchase business and it executed improvement in its group synergy. The strong team of hire purchase (HP) staff and an efficient operating system have enabled the bank to maintain the largest player position in the HP market. As a result of the bank s appropriate group strategies, business and financial performance of the bank and its subsidiaries continue to improve. An increase in bundled products and cross selling strategies of the bank strengthened market position of key subsidiaries related to securities, fund management, leasing, life insurance and non-life insurance businesses. As of December, on a consolidation basis, TBANK s total loans were Bt276,430 million, up by 21% from Bt228,986 million as of December. TBANK posted strong growth in hire purchase lending by 21% to Bt203,829 million from Bt167,956 million. Of the total loans, hire purchase lending accounts for 74%, remaining stable since December. This growth is in line with TBANK s strategy to position as the market leader in auto hire purchase lending. On a consolidation basis, its four main businesses (hire purchase, insurance, securities and asset management) have enabled TBANK to fully diversify the

2 revenue base. In December, non-interest income accounted for 49% of total income, up from 43% of total income in December, due mainly to the increase of revenue from insurance business. Regarding to TBANK s funding structure, the bank also succeeded in its funding restructuring plan. The bank has significantly expanded the size of savings deposits with more diversified retail deposits. The savings deposits are considered as a stable and cheap funding source for commercial banks. As of December, the bank s total deposits increased by 43% from and savings accounts were more than 27% of total deposits. After recapitalization with entry of BNS in July, TBANK s capital base was stronger, as reflected by an increase in the ratio of equity to total assets from 5.9% in to 7.0% in. However, the ratio reduced to 5.6% as the bank s assets grew strongly by 25.8%. At the same time, the bank s BIS ratio increased from 11.1% to 12.0% as the bank has utilized its capital for portfolio expansion. In, the BIS ratio under Basel II criteria for TBANK declined to 11.18% in As TBANK had a good asset quality and sufficient allowance for possible loan losses, its ratio of non-performing assets (classified loans more than three months pass due, outstanding amount of troubled debt restructuring and foreclosed property) was only 0.3 times its capital fund and allowance for loan loss, which provides sufficient cushion against downside risk from adverse changes in operating environment. Rating Outlook The stable outlook recognizes TBANK s designated role as the group s core financial and banking operator. The outlook also takes into account the expectation that TBANK will be able to maintain its strong market position in its major business, HP lending, with controllable asset quality. Driving force for fee income growth and the group s cost synergy are expected to help offset the rising investment in additional branch network during the expansion phase. 2

3 Key Rating Considerations Strengths/Opportunities Competent and experienced management Strong market position in HP business Improved group synergies Good risk management system Supports from BNS Weaknesses/Threats Limited franchise value, compared with larger-sized commercial banks High concentration on HP portfolio Less favorable operating environment Corporate Overview TBANK was established in January 2002, after receiving a restricted commercial bank license from the Ministry of Finance (MOF) following the merger of Ekachart Finance PLC and four other credit fanciers. The bank commenced operations in April 2002, with registered and paid-up capital of Bt11,048 million and Bt8,102 million, respectively. With a restricted bank license, the bank was initially allowed to provide all types of banking services checking accounts, overdrafts, and foreign exchange products. Permission to for these three remaining products was granted in As part of the Financial Sector Master Plan, financial services conglomerates required to reorganize to eliminate duplicate deposit-taking functions under the One Presence policy. TCAP, together with TBANK, submitted a reorganization plan for Thanachart Group in the middle of The plan was finally approved by the MOF in April According to the plan, all of TCAP s financial businesses were transferred to TBANK and TCAP became a financial holding company of TBANK. Since then, TBANK has served as a universal bank and the core operating company of Thanachart Group. In order to comply with the restructuring plan and in accordance with the Bank of Thailand (BOT) principle of consolidated supervision, on 12 July TBANK bought eight subsidiaries from TCAP for Bt4,158 million, the book value as of 30 June. These subsidiaries are Thanachart Securities PLC (TNS), Thanachart Insurance Co., Ltd. (TINSURE), Thanachart Life Assurance Co., Ltd. (TLIFE), Thanachart Fund Management Co., Ltd. (TFUND), Thanachart Broker Co., Ltd., Thanachart Group Leasing Co., Ltd. (TGL), Thanachart Management & Services Co., Ltd. and Thanachart Legal and Appraisal Co., Ltd. On 28 September, TBANK purchased an additional 6,000,000 shares of TINSURE from an unrelated person, at Bt13.02 per share (book value as of 31 July ) for a total of Bt78.12 million. Following this purchase, TBANK held a 100.0% stake in TINSURE. In July, TCAP signed a joint venture agreement with a new strategic partner from Canada, BNS, which made a large investment in TBANK. As a result, TBANK has two major shareholders, TCAP and BNS, holding 74.48% and 24.98% of TBANK s paid up capital, respectively. Minority shareholders of TBANK held 0.54% of paid up shares below the 15% required by the Stock Exchange of Thailand (SET). As of December, TCAP s shareholding stake was up to 74.92%. On 15 January, TBANK delisted its shares from the SET. TCAP bought out the minority shareholders. On 3 February 2009, TCAP sold an additional million new ordinary shares to BNS. This sale reduced TCAP s stake to 50.92% while BNS holds 48.99%. Table 1: TBANK Group Businesses Percentage TBANK s Subsidiaries owned by TBANK Financial Services: Securities Business Thanachart Securities PLC 100% Thanachart Fund Management Co., Ltd. 75% Insurance Thanachart Insurance Co., Ltd. 100% Thanachart Life Assurance Co., Ltd. 100% Leasing Thanachart Group Leasing Co., Ltd. 100% - T Leasing Co., Ltd. 100% - National Leasing Co., Ltd. 100% Supporting Businesses: Thanachart Broker Co., Ltd. 100% Thanachart Management and Services Co., Ltd. 100% Thanachart Legal and Appraisal Co., Ltd. 100% Thanachart Training and Development Co., Ltd. 100% Sources: TCAP, TBANK Recent Developments BNS lifts shareholding to 49% On 3 February 2009, TCAP sold an additional 416,526,737 ordinary shares of the 3

4 Bank to BNS at a price of Bt18.38 per share or a total of Bt7.7 billion. This price was 1.6 times the net book value because BNS exercised the purchase option within the obligation period. TCAP booked a Bt2.8 billion gain from sale of investment in 1Q09. BUSINESS ANALYSIS TBANK operated smoothly during the transition period as part of the Thanachart Group reorganization plan. The bank has demonstrated that it is able to handle auto hire purchase lending, formerly TCAP s main line of business. The loan portfolio has grown substantially. Restructuring of all the financial services in accordance with the BOT requirement for consolidated supervision was also completed smoothly. As a result, TCAP became a pure holding company, and TBANK became the core operating unit for the group. During -, TBANK succeeded in building its branch network, completed two major tasks in core banking and IT development and developed a standard risk management framework. By raising its stake in TBANK to 49% in early 2009, BNS reaffirmed its commitment and support for TBANK. Since BNS became a strategic partner in, TBANK has successfully integrated the corporate cultures of BNS and Thanachart Group. BNS has designated three directors and placed seven managers in the key business units of Thanachart Group. These managers play a key role in improving working procedures, enhancing innovation, plus leveraging experience and knowledge. The partnership and larger investment will help enhance the financial stability, capability and sustainability of TBANK. However, TBANK has not yet fully leveraged all the available synergies from the hookup with BNS. Greater synergies would further enhance the group s franchise value. Smooth transition to One Presence in 2005 As part of the transition plan to One Presence that was approved by the MOF in 2005, TBANK took over all of the parent company s financial services businesses including the corporate loan portfolio of Bt18,035 million. TBANK also assumed the staff and operating systems of TCAP s HP business, but did not take over the HP loan portfolio of Bt88,699 million. TCAP will continue to operate as a holding company. On 9 May 2005, TCAP ceased HP loan origination in the Bangkok area. Simultaneously, TBANK began building its own HP portfolio in Bangkok, using TCAP s Bangkok-based staff, who are on TBANK s payroll. All HP loans extended before 9 May 2005 will continue to be booked in the TCAP accounts until all existing loans are repaid. In June 2005, TBANK started to originate HP loans upcountry after TCAP ceased HP loan origination in the provinces and passed the business and the staff to TBANK. As of December, TCAP s existing HP portfolio was Bt23,069 million but by December, the portfolio value had fallen to Bt8,177 million. On the liability side, effective in the second half of 2005, all deposits (promissory notes or P/N) carried on TCAP s balance sheet were merged with TBANK s deposits, an essential step towards the One Presence structure. This move turned TBANK into the group s sole deposit-taking institution. P/N holders either converted the P/N into a bank deposit account with the same rate of return or continued to hold the P/N until the end of the tenure. TBANK lent the parent company an amount sufficient to balance the assets and liabilities. As of December, the outstanding amount provided to TCAP decreased tremendously from Bt12,500 million in to Bt4,500 million, in line with the One Presence policy. Restructuring in, makes TCAP a pure holding company On 5 July, the BOT approved Thanachart Group s restructuring plan in accordance with the principle of consolidated supervision. The restructuring was smoothly implemented. TCAP s key financial subsidiaries became TBANK s subsidiaries, while TCAP was transformed into a financial holding company consisting of TBANK and two asset management companies, NFS Asset Management Co., Ltd. and MAX Asset Management Co., Ltd. In, 547 employees were transferred from TCAP to TBANK with identical compensation and benefits. TBANK became the core operating network for five main financial services businesses of the group: insurance, fund management, securities and securities-related, leasing & hire purchase, and supporting businesses. Rapidly enlarged network and improved system in TBANK started its banking business in 2002 at the headquarters location and opened five Thanachart Bank PLC 4 18 March 2009

5 more branches in In 2004, TBANK added eight more branches for a total of 13, nine of which were located in Bangkok. In 2005, the bank added 53 branches for a total of 66. In, the bank added 67 more branches, making a total of 133 branches. By the end of, the bank had 213 branches, from 166 branches in. In 2009, TBANK plans to have 255 branches in total. Currently, of all branches, 112 are in Bangkok and its vicinity while the remaining 101 branches are upcountry. The bank opened 20 foreign exchange booths in high traffic areas, bringing the total to 76 from 64 in. Along with the branch network expansion, TBANK now offers 377 pool services ATM that allow customers to withdraw and transfer money between TBANK accounts and other banks. The bank also provides securities brokerage services through TNS at the head office, 30 full branches and three sub-branches. The bank also continues to enhance its e-banking capability with a telephone banking service called Thanachart Smart Phone, a new service channel. Increased product breadth The bank has developed the internet banking platform and set up a core banking system to support the cross-selling of financial products among Thanachart Group. To increase the breadth of the product line, Product Development Committee creates new financial products that fit the group s overall strategy. As a result, TBANK has been able to add more bundled products to meet clients need. Since, the group has successfully utilized the branch network, updated key systems, and created innovative products to boost market position. Loans are the largest portion of assets Market position in terms of asset size improved significantly after Thanachart Group s reorganization. A rapid expansion enlarged the bank s assets. In 2004, market position in terms of asset size rose from 10 th and 1% market share to 8 th in with a 4.6% market share among all 12 Thai universal banks. The bank s consolidated asset size increased from Bt72,944 million at the end of 2004 to Bt378,348 million at the end of. Of the total, 73% were total loans (gross loans and net accrued interest receivables), followed by interbank and money market transactions (17%), net investments in securities (8%) and other assets (1%). 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Chart 1: TBANK Asset Structure 9% 5% 1% 10% 8% 4% 3% 1% Other assets 81% 78% 78% 65% 57% 43% 76% 73% 12% 28% 41% 2% 1% 1% 26% 21% 9% 2% 9% 8% 9% 13% 17% Source: TBANK 8% Net loans Net investment in Securities Interbank and money market Well-positioned to expand HP loans After the auto HP business was transferred from TCAP to TBANK in May 2005, TBANK has been well equipped to succeed in new HP loan financing. TBANK benefits from extensive branch network and was able to acquire new hire purchase loans worth Bt7,500 million per month in gross vale in. The number was averaged a higher value than the Bt4,000 million in new hirepurchase loans per month in In and, the value of new hire-purchase loans per month averaged approximately Bt7,600 million, higher than in, entitling to record the market share of 29% for the whole year. The consolidated value of hire-purchase loan outstanding (gross) increased by 11% to Bt211,828 million as of December from Bt191,025 million in. Of the total outstanding, 4% were from TCAP s existing hire-purchase loan portfolio (Bt8,000 million) and 94% were from TBANK s hirepurchase portfolio (Bt198,344 million). Chart 2: Hire Purchase Loans Outstanding (Gross) by TCAP and TBANK Bt Billion TCAP Only TBANK Only Consolidated Growth Line 40.0% % % % % 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Source: TBANK 5

6 Market leader in auto HP lending Over the past five years, the outstanding value of hire purchase loans (both for new and used cars) of the 20 companies in the TRIS Rating database grew by an average of 23% per year. At the end of, the total value of the outstanding loans was Bt734,044 million, representing 7.8% year-on-year (y-o-y) growth from Bt680,860 million in, despite a 3% drop in domestic automobile sales. TBANK succeeded in maintaining its leading position in the auto HP business, a position it has held since 2003, with a market share of 28.9% in, followed by GE Capital Auto Lease Co., Ltd. (13.3%), TISCO (11.6%), Toyota Leasing Co., Ltd. (a captive leasing operator) with 10.7%, and Siam Commercial Leasing PLC (8.2%). Corporate loans rising TBANK is making more corporate loans. In, corporate loans grew 27% from Bt39,628 million in to Bt 50,244 million. As of December, TBANK s consolidated loan portfolio was Bt276,430 million. Corporate loans accounted for 18.2% of total loans, up from 17.3% in, while the remainder (81.8%) was personal consumption loans. TBANK s personal consumption loans as of December were divided between hire purchase loans (73.7% of total loans) and other personal use loans (8.1%). On the corporate side, real estate and construction accounted for 5.3% of total loan portfolio, followed by public utilities and services (4.7%), manufacturing & commerce (4.6%), loans to related companies (3.1%) and agricultural loans (0.5%). In 2009, TBANK continues to offer term loans and other credit facilities to corporate customers and selected small to medium enterprises. As it proceeds with its new strategic partner to expand the business network, TBANK is expected to leverage BNS s know-how and expertise to enlarge the customer base in both the retail and corporate segments. The growth is expected to gradually improve the mix of loans in the portfolio. Chart 3: TBANK Loan Portfolio Breakdown by Sector as of December 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: TBANK Related Companies Personal Consumption & Others Hire-purchase Public utilities & services Real estate and construction Manufacturing & Commerce Agriculture and mining Significant improvement in insurance via subsidiaries TBANK provides both life and non-life insurance through two subsidiaries, TINSURE and TLIFE. Because of synergy with the Thanachart Group, market position in the insurance business has improved continuously. According to the Office of Insurance Commission (OIC), the total value of domestic life insurance premiums for 24 life insurance firms totaled Bt219,041 million for, up 11% from. Life insurance premiums at TLIFE soared by 48% to Bt4,840 million in from Bt3,280 million in. TLIFE s market share, in terms of insurance premiums, improved continuously from 0.78% in to 1.66% in and to 2.21% in. TLIFE has a strong competitive position in group life insurance which accounted for 70.3% of life insurance premiums at the company. TLIFE has 17.5% market share for this product, the market-leading position. For non-life insurance, the total value of domestic insurance premiums was Bt3,147 million for, a 23% increase from. Auto insurance premiums accounted for the biggest portion (approximately 60%) of total domestic non-life insurance premiums. TINSURE has a competitive edge in auto insurance, through bundling with TBANK s HP business. TINSURE was among the top ten auto insurers in June 2005, with market share of 2.2%. Market share has gradually increased to 3.1% in, 3.5% in and to 3.7% in. 6

7 Improved performance seen in securities business TBANK operates a securities business through a subsidiary, TNS. TNS provides five main services: stock brokerage, derivative trading, bond dealing, investment banking and ETF trading at its Bangkok head office, 30 full branches and three sub-branches. In June 2005, TNS joined hands with BNP Paribas Peregrine to form a strategic alliance for securities brokerage, investment banking and research. This pairing has continuously enhanced TNS s market position. In, TNS ranked 7 th with a market share of 3.98%, an improvement from 18 th place with a market share of 2.61% in TNS s client base has shifted significantly. In 2004, client structure was highly concentrated on retail investors (89%), while the rest were institutional investors (7%) and foreign investors (4%). After forging the alliance with BNP Paribas Peregrine in 2005, the clients mix improved as the proportion of institutional and foreign investors increased to 9% and 6%, respectively. As of December, 62% of TNS s clients were retail investors, 10% were institutional investors and 28% were foreign investors. Improved market share in fund management business Fund management in Thailand shows gloomy prospects. As of December, the net asset value (NAV) of the Thai mutual fund industry was Bt1,524,663 million, or a 5% decrease from. At the same time, the NAV of provident funds was Bt465,297 million (5% y- o-y growth), while the NAV of private funds was Bt169,418 million (a 4% y-o-y drop). Across the industry, the combined NAV of these three types of funds was Bt2,159,378 million in, down by 3% from Bt2,228,091 in. TBANK provides fund management services through a subsidiary, TFUND. The services cover management of mutual funds, provident funds, private funds and retirement funds. While TFUND has improved its market position. It still has a relatively small share when compared with some large commercial banks. Across all types of funds, TFUND managed Bt78,207 million in NAV, with a market share of about 3.5% in, up from around 3% in and 3.5% in. TFUND ranked seventh in terms of NAV for mutual funds. Market share improved to 4.8% in from 3.6% and 4.5% in. Market share for provident funds was less than 1% of NAV during Synergy and integration with BNS yet to be realized Under the Shareholder s Agreement signed on 29 April between TCAP and BNS, BNS expressed the intent to purchase up to 49% of TBANK s issued and outstanding ordinary shares from TCAP. If fully executed, TCAP s stake will fall to 51%. The transaction was completed in February 2009; BNS now holds 48.99% of TBANK. BNS has a long-term investment in TBANK which will leverage the know-how to develop TBANK s platform and broaden the range of banking services to international standards. A long-term key challenge is to achieve the full measure of synergies with BNS to build a strong franchise value, helping the group to mitigate business concentration risk, diversify source of income and achieve cost efficiencies. Risk management framework improves TBANK has continuously developed and implemented a risk management system that measures risk on a consolidated basis. The company established an international standard risk management framework to comply with BASEL II. With a large retail customer base, TBANK has developed an in-house information management system to support credit risk management across the group. BNS is expected to help TBANK develop the risk management system and enhance efficient risk management practices organization-wide. Improvement of the risk management system, an experienced management team, and a strong base of capital funds are crucial factors to protect the company from medium-term downside risk. ASSET QUALITY Maintaining good asset quality The bank started up in 2002 with good asset quality compared with the industry average, and asset quality has held at a relatively good level. The ratio of consolidated non-performing assets or NPAs, (classified loans more than three months past due, outstanding balance of restructured debts, and foreclosed property) to total assets was 3.13% in, down from 9.83% in The ratio was far lower than the average of 11.72% for all 12 Thai universal banks. The largest portion of the NPAs was classified loans more than three months past due Thanachart Bank PLC 7 18 March 2009

8 (23%), followed by troubled debt restructuring outstanding (63%) and foreclosed property (14%). NPA : Bt mil 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Chart 4: TBANK Non-performing Asset Structure 2,850 3,834 4,918 7,171 8,200 7,760 9,642 11,845 38% 49% 13% 33% 34% 33% 40% 37% 13% 47% 10% 53% 44% 46% 38% 28% % 48% 13% 57% 15% Troubled Debt Restructuring Foreclosed Property Classified Loans Source: TRIS Rating Portfolio credit risk may rise TBANK s NPL ratio improved after the bank took over HP lending from TCAP in The NPL ratio of the HP portfolio is relatively lower than the ratio for corporate lending. In addition, rapid HP loan growth since 2005 helped reduce the NPL ratio. The NPL ratio decreased from 8.42% in 2004 to 2.25% in 2005 and 1.56% in. However, as expected, the NPL ratio rose to 2.29% in and to 2.62% in due to a higher portion of used car HP. The ratio was considered low when compared with the average NPL ratio of about 6.6% for 12 Thai universal banks. As of December, Thanachart Group s NPL ratio for hire purchase loans was 1.85% of sector loans, which was lower than the average of 2.0% for the seven commercial bank-based HP operators covered by TRIS Rating. Because the used car HP portfolio is now a larger portion of the total loan portfolio, credit risk is expected to rise in the future. PROFITABILITY TBANK s profitability in improved significantly, even as operating expenses increased during the expansion period. The interest spread gradually improved due to a lower cost of funds as the bank shifted the funding structure to rely more on public deposits. Going forward, the ability to generate returns from investments, maintain good quality loans, diversify the revenue base, and control costs by streamlining operating systems will be crucial to profitability. 63% 14% 23% Revenue base now includes non-interest income After the restructuring, TBANK s revenue base was more diversified and now includes feebased income. Interest income from loans increased significantly after 2004, because the amount of hire purchase loans rose rapidly. Interest income was Bt5,309 million in 2005, more than double the 2004 level of Bt2,328 million. In, interest income was Bt20,687 million, up from Bt17,488 million the previous year. After the second restructuring in, TBANK s income structure shifted to rely more on non-interest income. Interest income was 92% of total income in, and decreased to 74% in after the bank acquired key subsidiaries from TCAP. In, the ratio changed drastically. Insurance premiums now comprise 67% of total non-interest income. Fee Income/TT Income (%) Chart 5: Fee-based Income to Total Income BAY TMB TCAP TBANK TISCO KK ACL Avg 12 Source: TRIS Rating AVG TOP AVG Small 4 Slight decline in interest expense in Interest expenses increased markedly to Bt9,510 million in, which was more than three times the amount in This rise was mainly due to rising deposit rates and the attractive deposit rates TBANK offered to draw more deposits. The success in taking savings deposits and lower market interest rates cut the funding costs to 3.12% in from 3.75% in. Improved interest spread TBANK s yield on average earning assets declined slightly from 7.02% in to 6.39% in and to 6.19% in, in line with market interest rates. As the decrease in funding costs was higher than the decrease in interest 8

9 yields, the spread widened from 2.41% in to 2.65% in and to 3.09% in. The bank succeeded in mobilizing cheap funds from public deposits, pushing the spread to the level close to the average of 3.35% for 12 Thai universal banks. High operating expenses In terms of efficiency, the ratio of operating expense to total income (including total interest income and non-interest income) increased to 50% in, from 42% in and 34% in. The rise was primarily due to the transfer of staff from TCAP to TBANK s payrolls. The ongoing branch network expansion also pushed operating expenses higher. The ratio stayed above the industry average of 41% for all 12 Thai universal banks. Operating Expenses /Total income (%) Chart 6: Operating Expenses to Total Income BAY TMB TCAP TBANK TISCO KK Avg AVG TOP AVG Small 4 Source: TRIS Rating Net profit increased from Bt225 million in to Bt1,347 million in and to Bt1,900 million in. Return on average assets (ROA) increased from 0.48% in to 0.55% in. At the same time, return on average equity (ROE) has also been rising, from 7.34% in to 8.83% in. TBANK s profitability ratios, both ROA and ROE, were relatively lower than the industry averages of 1.07% ROA and 11.31% ROE, respectively. Although TBANK showed a higher spreads in, this was offset by relatively high operating expenses. Streamlining and realigning bank operating systems will help minimize costs, a crucial factor for future profitability. FUNDING/LIQUIDITY Deposits the main funding source In, TBANK mobilized more funds from deposits. TBANK provides the group with greater access to stable and flexible sources of funds, both in terms of public borrowings (deposits) and the money markets. TBANK now has higher funding flexibility and liquidity. Since 2005, TBANK has successfully restructured its funding sources, making the structure of liabilities more reliant on deposits from a more diversified base of depositors. With attractive deposit rates (averaging basis points above the average for the top six commercial banks, more bundled products, the bank has significantly expanded the amount of saving deposits. The deposit base rose from Bt45 billion at the end of 2004 to Bt270 billion at the end of. Saving deposits are a stable and cheap funding source for commercial banks. Alternative source of funds In September, BOT permitted commercial banks to extend bills of exchange (B/E) to the public. B/Es are now an alternative funding source for commercial banks. As with other commercial banks, TBANK replaced some portion of deposits with B/Es. As of December, TBANK had issued Bt53,150 million in B/Es, slightly down from Bt54,288 million in. Asset-liability mismatch was alleviated by deposit roll-over rate Deposit structure was 72% time deposits, 27% savings deposits and 1% promissory notes plus on-call deposits. Due to its high liquidity, TBANK was a net lender in the money market, amounting to Bt58,412 million. At the end of, TBANK s asset-liability structure had some mismatch in terms of duration and interest rate structure, the maturity mismatch was alleviated by a rollover rate of more than 90% of TBANK s deposits. TBANK s consolidated ratio of loans to adjusted public borrowing decreased to 88.83% from 87.61% in and 86.42% in, which indicated improvement in its liquidity. CAPITALIZATION High quality capital with a large proportion of Tier-1 capital As of December, the equity to asset ratio decreased to 5.64% from 6.98% in, while the capital adequacy ratio (BIS Ratio) also fell sinking from 12.00% to 11.18% (under Basel II criteria) as the bank leveraged to expand its business. TBANK has a large proportion of Tier-1 capital. Consolidated capital funds comprise 72% Tier-1 capital and 28% Tier-2 9

10 capital. TBANK s retains a small portion of operating profits, due to high dividend payouts to major shareholders. However, the bank has a policy to maintain the BIS ratio at no less than 11%. Chart 7: Capital Fund Structure only 0.34 times, which was almost the same as in. The ratio was far lower than an average ratio of 0.84 times for the 12 Thai universal banks. The low ratio indicates TBANK s strong cushion of capital funds and allowance for loan losses against bad debts, which supports business expansion plan. BIS Ratio (%) % Source: TRIS Rating 15.4% 11.1% 11.2% 14.9% TISCO KK TCAP TBANK BAY Avg % 14.7% Avg. 6 Strong cushion of capital fund and allowance for loan loss against bad debt At the end of December, the ratio of non-performing assets (non-performing loans, the outstanding balances of restructured debts, and net foreclosed property) to total capital funds plus allowance for doubtful accounts and revaluation allowances for debt restructuring was Tier2 Tier1 NPA to Capital Fund+Allowance for loan loss (time) Chart 8: Ratio of NPA to Capital Fund Plus Allowance for Loan Loss as of December BAY TMB TCAP TBANK TISCO KK ACL Avg 12 Source: TRIS Rating AVG TOP AVG Small 4 10

11 Financial Statistics* Unit: Bt million Year Ended 31 December Total assets 378, , , ,525 72,944 Investment in securities 30,712 23,172 21,894 17,415 19,173 Total loans 276, , , ,862 31,158 Allowance for doubtful accounts 7,087 5,048 3,133 1,908 1,212 Deposits 270, , , ,015 45,019 Borrowings (including interbank) 68,441 73,452 37,192 27,640 18,069 Shareholders' equity 21,341 20,980 15,199 15,300 8,901 Net interest income 11,290 8,092 6,010 2,472 1,115 Bad debts and doubtful accounts 3,968 2,692 1, Non-interest income 10,700 6,110 1, Operating expenses 15,535 9,904 5,744 2, Net income 1,900 1, * Consolidated financial statements Key Financial Ratios* Unit: % Year Ended 31 December Profitability Net interest income/average assets Non-interest income/average assets Fees and brokerage income / total income Operating expenses/total income Operating profit / average assets Return on average assets Return on average equity Asset Quality Non-performing loans/average loans Non-performing assets/total assets Bad debt and doubtful accounts/average loans Allowance for doubtful accounts/total loans Capitalization Shareholders' equity/total assets Shareholders' equity/total loans BIS ratio Liquidity Total loans/deposits** Deposits**/total liabilities Total loans /total assets * Consolidated financial statements ** Including short-term bills of exchange 11

12 N e w s f o r I n v e s t o r s Rating Symbols and Definitions TRIS Rating uses eight letter rating symbols for announcing medium- and long-term credit ratings. The ratings range from AAA, the highest rating, to D, the lowest rating. The medium- and long-term debt instrument covers the period of time from one year up. The definitions are: AAA The highest rating, indicating a company or a debt instrument with smallest degree of credit risk. The company has extremely strong capacity to pay interest and repay principal on time, and is unlikely to be affected by adverse changes in business, economic or other external conditions. AA The rating indicates a company or a debt instrument with a very low degree of credit risk. The company has very strong capacity to pay interest and repay principal on time, but is somewhat more susceptible to the adverse changes in business, economic, or other external conditions than AAA rating. A The rating indicates a company or a debt instrument with a low credit risk. The company has strong capacity to pay interest and repay principal on time, but is more susceptible to adverse changes in business, economic or other external conditions than debt in higher-rated categories. BBB The rating indicates a company or a debt instrument with moderate credit risk. The company has adequate capacity to pay interest and repay principal on time, but is more vulnerable to adverse changes in business, economic or other external conditions and is more likely to have a weakened capacity to pay interest and repay principal than debt in higher-rated categories. BB The rating indicates a company or a debt instrument with a high credit risk. The company has less than moderate capacity to pay interest and repay principal on time, and can be significantly affected by adverse changes in business, economic or other external conditions, leading to inadequate capacity to pay interest and repay principal. B The rating indicates a company or a debt instrument with a very high credit risk. The company has low capacity to pay interest and repay principal on time. Adverse changes in business, economic or other external conditions could lead to inability or unwillingness to pay interest and repay principal. C The rating indicates a company or a debt instrument with the highest risk of default. The company has a significant inability to pay interest and repay principal on time, and is dependent upon favourable business, economic or other external conditions to meet its obligations. D The rating for a company or a debt instrument for which payment is in default. The ratings from AA to C may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within a rating category. TRIS Rating s short-term ratings focus entirely on the likelihood of default and do not focus on recovery in the event of default. Each of TRIS Rating s short-term debt instrument covers the period of not more than one year.the symbols and definitions for short-term ratings are as follows: T1 Issuer has strong market position, wide margin of financial protection, appropriate liquidity and other measures of superior investor protection. Issuer designated with a + has a higher degree of these protections. T2 Issuer has secure market position, sound financial fundamentals and satisfactory ability to repay short-term obligations. T3 Issuer has acceptable capacity for meeting its short-term obligations. T4 D Issuer has weak capacity for meeting its short-term obligations. The rating for an issuer for which payment is in default. All ratings assigned by TRIS Rating are local currency ratings; they reflect the Thai issuers ability to service their debt obligations, excluding the risk of convertibility of the Thai baht payments into foreign currencies. TRIS Rating also assigns a Rating Outlook that reflects the potential direction of a credit rating over the medium to long term. In formulating the outlook, TRIS Rating will consider the prospects for the rated company s industry, as well as business conditions that might have an impact on its fundamental creditworthiness. The rating outlook will be announced in conjunction with the credit rating. In all cases, the outlook assigned to a company will apply to all debt obligations issued by the company. The categories for Rating Outlook are as follows: Positive The rating may be raised. Stable The rating is not likely to change. Negative The rating may be lowered. Developing The rating may be raised, lowered or remain unchanged. TRIS Rating may announce a CreditAlert as a part of its monitoring process of a publicly announced credit rating when there is a significant event that TRIS Rating considers to potentially exerting a substantial impact on business or financial profiles of the rated entity. Due to an insufficient data or incomplete developments of the event, such as merger, new investment, capital restructuring, and etc., current credit rating remains unchanged. The announcement aims to forewarn investors to take a more cautious stance in investment decision against debt instruments of the rated entity. CreditAlert report consists of a Rational indicating warning reasons, a CreditAlert Designation, and a current credit rating. Rating Outlook is withheld in the announcement. CreditAlert Designation illustrates a short-term rating outlook indicative of the characteristics of impacts on the credit rating in one of the three directions (1) Positive (2) Negative and (3) Developing. For subscription information, contact TRIS Rating Co., Ltd., Office of the President, Tel: ext 500 Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand, Copyright 2009, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. 12