KEY RATING CONSIDERATIONS
High competition limits loan growth
Due to intense competition, BSL has gradually lost its market position in equipment financing leasing. Japanese lessors and leasing subsidiary lessors of other Thai banks used an aggressive pricing strategy to build their market shares. The size of BSL's loan portfolio (only hire-purchase and financial leasing) slightly decreased by 1.6% in 2017 to Bt5,520 million, from Bt5,608 million in 2016. The expected economic growth in 2018 is an opportunity for BSL to expand its portfolio, but the intense competition will still be a major challenge.
Exposure to customer concentration risk
BSL's business is concentrated, as it operates only via its headquarters in the Bangkok Metropolitan Area (BMA). In addition, BSL is exposed to customer concentration risk, as the top 10 clients account for 30% of its loan portfolio as of December 2017. The concentration of BSL's customers can have severe effects if any major customer has a problem, as has been the case since 2016.
Deterioration in asset quality
Until 2016, BSL enjoyed good asset quality. The ratio of non-performing loans (NPLs or loans overdue for more than three months) to total loans was below 1% from 2013 to 2015. However, BSL's asset quality somewhat deteriorated after a major customer group experienced problems in 2016, causing the ratio of non-performing loans to total loans to rise to 8.7% as of December 2016. Excluding the impact from this major customer, BSL's asset quality remains good with a relatively low NPL ratio. The company's business profile was not yet affected by this bad circumstance. After loan restructuring and tightened debt collection, the NPL ratio decreased to 4.3% at the end of 2017.
Impact of deterioration of asset quality on net profit
BSL's profitability dropped significantly in 2016. BSL's net revenue (adjusted for net operating lease revenue) was Bt592 million in 2016 and Bt544 million in 2017, down from Bt633 million in 2015. BSL's financial performance significantly declined in 2016 and 2017 due mainly to the deterioration of asset quality. The company had to set a huge provision expense of Bt319 million in 2016 and Bt294 million in 2017. As a result, net profit significantly dropped to Bt40 million and Bt37 million in 2016 and 2017, respectively.
The return on average assets (ROAA) ratio decreased to 0.5% in 2017. The return on average equity (ROAE) also dropped to 1.97% in 2017. Meanwhile, the ratio of operating expenses to total income increased from 14.8% in 2015 to 16.7% in 2016 and 18.9% in 2017.
BSL's ability to manage residual risk of its leased assets will add to its non-interest income. After the prices of used cars bottomed out in 2014, gains from the sale of expired assets picked up, rising to Bt30 million in 2017. The fierce competition will pose challenges as BSL strives to improve its financial performance with good asset quality.
More diversified funding sources
Bangkok Bank PLC (BBL) is a major shareholder of BSL. However, BSL does not rely heavily on borrowings from BBL. As of December 2017, borrowings from BBL amounted to only 2.4% of BSL's total liabilities. BSL has diversified its funding sources by borrowing from other financial institutions as well as raising funds through the capital market. BSL began issuing bills of exchange (B/E) in 2010, senior unsecured debentures in 2011, and issued six tranches of Shogun bonds valued at US$120 million during 2012-2017.
BSL's available credit lines are sufficient to finance its current short-term liquidity gap. The steady cash flows BSL receives from customers' monthly installments give the company additional liquidity. BSL has secured a credit line from BBL, to use as a last resort if additional liquidity is needed.
Capital base remains strong
BSL has a strong capital base. Low dividend payout ratios helped improve its capital base. Shareholders' equity has decreased to Bt1,858 million in 2017. The ratio of shareholders' equity to total assets decreased continuously, to 23% in 2017. This ratio is relatively strong, compared with peers. BSL has maintained a strong enough capital base to absorb downside risks. As of December 2017, the debt to equity ratio was maintained at 3.4 times, compared with 3.3 times in December 2016.
RATING OUTLOOK
The "stable" outlook is based on TRIS Rating's expectation that BSL will continue to obtain financial support from its major shareholders, while continuing to diversify its funding sources. The outlook also takes into account the expectation that the management team will maintain BSL's current market position, the capital base will remain strong enough to serve as a cushion against asset quality deterioration, and BSL will deliver financial performance in line with TRIS Rating's expectations.
RATING SENSITIVITIES
The rating and/or outlook of BSL could be revised downward if there is further deterioration in its loan quality and/or business profile. In addition, the rating and/or outlook of BSL could be revised should there be any changes in BSL's shareholder structure, especially if BSL became one of BBL's financial conglomerates under the consolidated supervision platform. In that case, BSL's rating could be enhanced by additional support from the BBL Group.
COMPANY OVERVIEW
BSL was established in 1985 as Bangkok Commercial Leasing Co., Ltd. through a 50:50 (joint venture) between BBL and Sumitomo Mitsui Banking Corporation (SMBC), a Japanese bank, and related companies. BSL was established to provide industrial equipment financing services and vehicle financing services under lease and hire purchase contracts. BSL entered the factoring business in 2004. Currently, BSL's major shareholders are BBL, holding a 35.88% stake, the SMBC Group (40%), and JA Mitsui Leasing, Ltd. (10%). Both BBL and the SMBC Group provide supports to BSL in terms of credit facilities and some level of business referrals. The Bank of Thailand (BOT) has given BBL formal approval to maintain its shareholding stake (35.88%) in BSL. Despite the approval, BSL and BBL must still comply with a regulation that limits the amount of money a commercial bank may lend to a related company.
As of December 2017, the largest portion (39%) of BSL's loan portfolio comprised financing leases. Hire purchase loans comprised 28% of the portfolio in 2017, while operating leases, factoring, and other loans were 12%, 11%, and 10%, respectively. In terms of assets for lease, industrial equipment constituted 40% of the total, followed by automobiles at 31% and others at 29%.