KEY RATING DRIVERS
The ratings of AEONTS reflect a well-established franchise in Thailand's consumer finance sector. The company is one of the leading competitors in Thailand's credit card and personal loan market that is not affiliated with a bank, and it has built up a significant market presence despite competitive pressures. This franchise has enabled the company to post a consistently profitable financial performance through past economic downturns, including during recent challenges.
Gradually Improving Economic Environment: Fitch expects that the economic environment will be broadly supportive of the Thai consumer finance sector, with Fitch expecting GDP growth of 3.9% in 2023 (2022: 2.6% and 2021: 1.5%). Financial service providers will still have to contend with the after-effects of the Covid-19 pandemic, including an asset quality overhang and reduced regulatory interest rate ceilings for credit cards and personal loans. Even so, improving business activity will support labour markets and help prevent further downside risks for the sector.
Significant Market Presence: AEONTS has a sound presence in the consumer finance sector, supported by a nationwide network of 104 branches. Fitch believes that the company's franchise is sustainable, although competition will remain intense from both banks and non-banks, including potential new entrants. The company aims to diversify operations into hire purchase and neighbouring markets, but Fitch expects the domestic credit card and personal loan business to remain the key revenue driver.
Asset Quality Risks Remain: The impaired loans ratio remained high as of November 2022 (5.7%), but downside risks are mitigated by pre-emptive provisioning with loan loss allowance coverage of 186%. Fitch expects a more favourable economic outlook to ease the flow of new delinquencies in 2023, and we project that the impaired loans ratio will gradually fall below 5%. Still, risks to asset quality remain, particularly if the economic recovery is weaker than Fitch expects.
Earnings Resilient: AEONTS's earnings performance has remained sound despite the high provisioning requirements, with annualised pretax profit/average assets rising to 5.7% in November 2022, from 5.2% during the financial year end-February 2022. We expect some pressure on the net interest margin from the rising interest rate environment, which may affect funding costs. Nevertheless, the company has a long-term record of consistent profitability that Fitch expects will be maintained.
Improved Capital Buffers: AEONTS's consistent profit accumulation has led to a gradual strengthening in its capital position despite the one-off effect of TFRS9 implementation, which led to a rise in leverage ratios in February 2021. The debt/tangible equity ratio of 3.6x as of November 2022 should provide an acceptable buffer against unexpected downside, in Fitch's view. We expect the ratio to be maintained below 4x in the next few years.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
We may take negative rating action in the event of a substantial deterioration in the company's financial metrics, particularly a sustained deterioration in asset quality that puts pressure on earnings and capital loss-absorption buffers. For example, an impaired loans ratio sustained above 5% combined with weakening capital buffers with debt/tangible equity of above 5x, materially weaker pretax income/average assets and loan loss allowance coverage of below 100% would be negative for the ratings.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch may take positive rating action if we assess that the company's franchise and consistent risk profile will enable it to sustain stronger through-the-cycle financial performance relative to other similarly rated entities on the national rating scale.
This should be evident in gradual improvement in the impaired loans ratio to pre-pandemic levels, and pretax profit/average assets sustained above 4% and sufficient to absorb asset quality volatility through a credit cycle and steady internal capital generation that helps to maintain moderate debt/tangible equity leverage of below 4x. This assumes no material deterioration in AEONTS's risk appetite, earnings or balance-sheet buffers as it continues to grow.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
AEONTS's senior debt is rated at the same level as the company's National Long-Term Rating, as they represent unsubordinated and unsecured obligations of the borrower.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
AEONTS's senior debt rating would move in line with the company's National Long-Term Rating.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings