TISCO FINANCIAL GROUP PLC Credit News... · Tokyo Leasing Co., Ltd. ... TISCO has developed a proficient management team with a conservative management ... TISCO Financial Group PLC

Rating Rationale TRIS Rating assigns the company rating of TISCO Financial Group PLC (TISCO)

at “A‐”. The rating reflects TISCO’s position as an investment holding company of TISCO Group, its control of TISCO Bank PLC (TISCOB) through a 99.98% ownership stake, and a stable stream of dividends from TISCOB. TISCO’s rating is one notch lower than the rating of its core bank subsidiary, TISCOB. The one notch difference reflects TISCO’s dependence on dividends from TISCOB and the regulatory barrier to payments of those dividends. The rating takes into consideration the capability and experience of TISCO’s management team, sound risk management system, well‐diversified sources of income and ability to keep a strong market position in the auto hire‐purchase business. These strengths, however, are partially offset by the unforeseen risks which may arise after the implementation of the Deposits Protection Agency Act (DPA) in August 2011. The rating is also pressured by intense competition in the banking, hire‐purchase, and securities industries as well as the uncertainties in the economic and political environments. These factors might limit the group’s expansion opportunities and profitability in the future.

In 2008, TISCO and affiliated companies implemented the holding company restructuring plan. TISCO was set up to be a holding company and the parent company of the group, in place of TISCOB. As at 11 March 2011, TISCO’s largest shareholder was CDIB & Partners Investment Holding Pte Ltd. with a 10% stake, while the remaining shares belonged to local and foreign investors. At the end of 2010, TISCO was ranked 10th among all 13 Thai universal banks based on consolidated asset size, with 2.2% market share in loans and 0.7% share in deposits. On a consolidated basis, TISCO’s total assets were Bt171 billion, up by 23% from Bt139 billion at the end of 2009. TISCO has further diversified its revenue base. Fee‐based income, as represented by the non‐interest income to total income ratio, rose to 29% in 2010, up from 25% in 2009. In 2010, TISCO’s revenues came from its subsidiaries; TISCOB, TISCO Securities Co., Ltd., and TISCO Asset Management Co., Ltd., accounted for 75%, 11% and 8% of total revenue, respectively. The remaining 6% was contributed by Hi‐Way Co., Ltd. and TISCO Tokyo Leasing Co., Ltd.

TISCO’s financial profile has significantly improved, as illustrated by the 45% growth in net profit in 2010. Net profit rose to Bt2,888 million in 2010 from Bt1,988 million in 2009. TISCO’s return on average assets (ROAA) was 1.86% in 2010, up from 1.5% in 2009. At the same time, the bank’s return on average equity (ROAE) was the highest in the industry for 11 Thai universal banks (excluding United Overseas Bank (Thai) PLC and Standard Chartered Bank (Thai) PLC) based on TRIS Rating’s database. ROAE rose to 21.1% in 2010, up from 16.53% in 2009. The improvements were driven by increases in both interest income and fee‐based income, as well as improved efficiency in controlling credit cost and operating costs.

In terms of asset quality, TISCO has established a good risk management framework, with a consolidated and centralized risk management system. As a result, TISCO has good quality assets, as shown by the 1.76% ratio of non‐performing loans (NPL) to total loans in 2010, the lowest in the industry. At the same time, the company’s non‐performing assets (NPA) (classified loans more than three months overdue, plus outstanding troubled debt being restructured, and foreclosed property) were 0.19 times its capital funds plus the allowance for

Company Rating: A‐

Outlook: Positive

New Issue Rating: ‐

Contacts: Phisut Sakulthong [email protected]

Taweechok Jiamsakunthum [email protected]

Raithiwa Naruemol [email protected]

Watana Tiranuchit, CFA [email protected]

WWW.TRISRATING.COM

TISCO FINANCIAL GROUP PLC Announcement no. 786 13 May 2011

Page 2 TISCO Financial Group PLC 13 May 2011

doubtful accounts. This ratio improved from 0.24 times in 2009, and remains far below the industry average of 0.6 times. TISCO has developed a proficient management team with a conservative management style that has enabled the

company to support the competitive positions of its subsidiaries. The company’s consolidated risk management framework has improved continuously to match with international standards. However, the highly competitive banking industry may limit the growth and profitability of TISCOB in the future.

Rating Outlook

The “positive” outlook reflects the anticipation that TISCO will deliver the expected financial performance in the medium term. The outlook also reflects TISCO’s good risk management system, which will help alleviate future downside risks from the uncertainty in the economic and financial environments. Going forward, TISCO’s rating and outlook will be influenced by the challenges it faces from any unforeseen outcomes arising after the DPA takes effect, such as the ability to maintain its strengths and secure stable sources of funding at reasonable prices.

TISCO Financial Group PLC (TISCO) Company Rating: A‐ Rating Outlook: Positive

Key Rating Considerations Strengths/Opportunities

Competent and experienced management team Sound risk management system Ability to keep strong competitive position in auto

hire‐purchase business Well‐diversified sources of income Good asset quality Sustainable profitability

Weaknesses/Threats Limited distribution network Unforeseen outcomes from DPA implement in

August 2011 Intensifying competition in the banking and

securities businesses Uncertainties in domestic political and global

financial arenas

Corporate Overview TISCO was established in 2008 as a holding company

and the parent company of the TISCO Group in place of TISCOB. The change took place after the holding company restructuring plan, under the consolidated supervision scheme, was approved by the Bank of Thailand (BOT) on 13 November 2008. TISCO made a tender offer for all the shares of TISCOB in exchange for its own newly issued shares. The swap ratio was 1:1. TISCO acquired all the shares of TISCOB and its subsidiaries (i.e., TISCO Securities Co., Ltd. (TSC), TISCO Asset Management Co., Ltd. (TISCOASSET), Hi‐Way Co., Ltd. (HIWAY), TISCO Leasing Co., Ltd. (TISCOL) and TISCO Information Technology Co., Ltd. (TISCOIT)). This swap created a shareholding structure identical to TISCOB before the restructuring. TISCO commenced operations on 1 January 2009, with registered

capital of Bt11,002 million and paid‐up capital of Bt7,246 million. On 15 January 2009, TISCO was listed on the Stock Exchange of Thailand (SET) in place of TISCOB, while TISCOB was simultaneously delisted from the SET. At the end of 2010, TISCO’s paid up capital was Bt7,279 million. The largest shareholder of TISCO was CDIB & Partners Investment Holding Pte Ltd (CDIB), with an 11.82% stake in TISCO. In order to comply with existing laws and regulations, CDIB’s stake in TISCO was reduced to 10% as of 11 March 2011, while the remaining shares belonged to local and foreign investors. TISCO’s 10 largest shareholders held a 51.16% stake in total.

TISCOB, formerly named TISCO Finance PLC, was established in 1969 as a finance company owned by Bankers Trust New York Corporation (60% holding), Bancom Development Corporation (20%) and Kasikorn Bank PLC (20%). TISCOB was listed on the SET in 1983. On 22 October 2004, TISCOB received approval from the Ministry of Finance (MOF) to upgrade its status to be a commercial bank. TISCOB commenced banking operations on 1 July 2005, and changed its name from “TISCO Finance PLC” to “TISCO Bank PLC”. TISCOB has served as a universal bank and the core operating company of the TISCO Group, with a total of 45 branches as of December 2010.

TSC, formerly named Thai Securities Co., Ltd., was founded in 1975 as a subsidiary of TISCO Group. TSC operates a securities brokerage business.

TISCOASSET, formerly named Thai Capital Manage‐ment Co., Ltd., was established in 1992 in collaboration with Krung Thai Bank PLC, Bankers Trust International (Delaware) Inc., and International Finance and Consultants Co., Ltd., to serve as a fund management company.


After the holding company restructuring plan was implemented in 2008, TISCOB, HIWAY, TSC, TISCOASSET and TISCOIT became subsidiaries of TISCO, while TISCOL remained a subsidiary of TISCOB. As of December 2010, TISCO held a 99.98% stake in TISCOB and a 99.99% stake each in HIWAY, TSC, TISCOASSET and TISCOIT.

TISCO Tokyo Leasing Co., Ltd. (TISCOTL), a joint venture between TISCO Group (49%), Century Tokyo Leasing Corporation (49%) and Sompo Insurance Co., Ltd. (2%), was founded in 2008 to provide leasing services for Japanese corporations in Thailand.

Table 1: TISCO Group Structure

TISCO Group Structure % Ownership

Commercial Banking

TISCO Bank PLC 99.98

TISCO Leasing Co., Ltd. 99.99

Hi‐Way Co., Ltd. 99.99

TISCO Tokyo Leasing Co., Ltd. 49.00

Securities

TISCO Securities Co., Ltd. 99.99

TISCO Asset Management Co., Ltd. 99.99

Others

TISCO Information Technology Co., Ltd. 99.99Source: TISCO

BUSINESS ANALYSIS

TISCO Group renders all major financial services, in line with the universal banking platform. TISCO is a shareholder in its subsidiary companies, which cover four main businesses: commercial banking and auto hire‐purchase lending, operated by TISCOB, TISCOL, HIWAY and TISCOTL; as well as securities brokerage and fund management, operated by TSC and TISCOASSET.

Chart 1: TISCO Group’s Asset Structure

93%

2%

0%

0%

1%2%

2%

TIS CO B ank

T IS CO S ecurities

T IS CO Asset Managem ent

T IS CO Lea s ing

H i‐W ay

T IS CO Tokyo Lea s ing

O thers

Source: TISCO

Based on consolidated asset size at the end of 2010, TISCO was ranked tenth among all 13 Thai universal banks, with 2.2% market share in loans and 0.7% share in deposits. As of December 2010, TISCO’s total assets were Bt171,408 million, up by 23% from Bt138,804 million at the end of 2009, mainly due to the growth of loans made to both retail and corporate customers. Concentrates on retail products

As of December 2010, TISCO’s consolidated loan portfolio was Bt151,025 million, up by 32% from Bt114,249 million in 2009. This growth rate was above the industry average growth rate of 11.6% for 11 Thai universal banks. TISCO’s loan expansion was driven by greater demand for loans from both retail and corporate customers. Loans to these two customer segments grew by 22% and 66% year‐on‐year, respectively. The retail loan expansion was mainly in hire‐purchase lending (23% growth), whereas corporate loans expanded mainly in the public utilities and services sector (153% growth) and the manufacturing and commerce sector (74% growth). At the end of 2010, TISCO's loan portfolio was divided between retail banking loans (71% of total loans) and commercial loans (29%). The main portion of TISCO’s retail banking loans was hire‐purchase lending, accounting for 70% of the total loan portfolio. On the corporate side, the loans to clients in the manufacturing and commerce sectors comprised 12% of total loans, followed by the public utilities and services sector (5%), and the real estate and construction sector (4%).

Chart 2: TISCO’s Consolidated Loan Portfolio

Breakdown by Sector

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010

10 10 9 7 9 12 6 6 6 8 5 4

3 3 3 3 2 5

69 72 74 74 76 70

8 6 6 5 6 8 Others

Hire-purchase

Housing

Public utilities & services

Real estate and construction

Manufacturing & Commerce

Agriculture and mining

Source: TISCO

Improved market position and significant growth in auto hire‐purchase lending TISCO has shifted toward retail banking, expanding its

loan portfolio by leveraging its strength in auto hire‐purchase lending. TISCO is also well‐equipped to make


new hire‐purchase loans. As of December 2010, TISCO’s hire‐purchase loans totaled Bt117,133 million, up by 23.4% from Bt94,895 million in 2009. TISCO was the third‐largest auto loan provider in Thailand during 2008‐2010, up from the fourth place in 2006 and the fifth place in 2007, with approximately 13% market share based on TRIS Rating’s database. TISCO has adjusted its strategy to focus more on used car loans, which enabled the Group to add more on high yield loans to its loan portfolio. As a result, the ratio of outstanding used car loans to new car loans has shifted from 11:89 in 2004 to 17:83 in 2010.

Well‐diversified sources of income TISCO Group offers a wide range of financial products

and services, including conventional lending and hire‐purchase loans, deposit‐taking, securities brokerage, financial advisory services, asset management and bancassurance. TISCO has implemented a cross‐selling strategy through its business networks and developed new products and services to generate more revenue from its customer base. The hire‐purchase, securities brokerage and asset management businesses have been the core businesses under TISCO’s diversified business portfolio. In 2010, most of TISCO’s revenues were contributed by four subsidiaries: TISCOB, TSC, TISCOASSET and HIWAY, contributing 75%, 11%, 8% and 5% of total revenue, respectively.

Chart 3: TISCO Group’s Revenue Breakdown

0%10%20%30%40%50%60%70%80%90%

100%

2005 2006 2007 2008 2009 2010

62 60 63 70 77 75

14 15 17 1210 115 6 9 9 9 813 14

9 7 3 5

TISCO Bank T ISCO Securities

T ISCO Asset Management T ISCO Leasing

H i‐Way TISCO Tokyo Leasing

Source: TISCO

Expand fee‐based income in bancassurance

TISCOB operates the bancassurance business. The bank was granted an insurance brokerage license from the Department of Insurance in October 2005. The bank is a life insurance and non‐life insurance broker, providing life insurance, health insurance, auto loan protection insurance (ALP), auto insurance, fire insurance, accident insurance and miscellaneous insurance. Fee income from bancassurance services helps diversify TISCO’s

sources of income. This source is likely to grow rapidly as TISCOB expands its auto loan business. In 2010, TISCOB’s fee income from bancassurance services was Bt821 million, rising steadily from Bt249 million in 2005, or a 27% annual average growth rate over the past five years. The proportion of bancassurance service fees to total income has also gradually increased, rising from 5% in 2005 to 8% in 2010.

Good risk management system

TISCO Group has established an overall risk management framework containing the standards of best practices and high‐quality corporate governance. The risk management infrastructure is centralized, consolidating the risk exposures from all subsidiaries under the TISCO Group. TISCO has continued to develop advanced technologies and has utilized its efficient management of information to improve efficiency. The efficiency improvements have enhanced the group’s competitive position, especially in the commercial banking segment. Following the policy of the TISCO Group, TISCOB has implemented the risk management and control systems to assess and manage all bank risk exposures to ensure financial soundness and safety. Since 2009, TISCOB has implemented a risk management system in compliance with BASEL II, by utilizing the Internal Ratings Based (IRB) approach to calculate the regulatory‐mandated amount of capital needed based on credit risk management. Starting in June 2010, TISCO officially adopted the Basel II Standardized Approach (SA) to make the regulatory capital calculation of credit risk. Furthermore, TISCOB has established the Internal Capital Adequacy Assessment Process (ICAAP), which could help the bank improve the efficiency of its risk management and capital management activities. The combination of TISCO Group’s reliable risk management system and its experienced management team provides crucial group‐wide protection from future downside risk.

Securities brokerage is one core business

TISCO has provided securities brokerage services via its subsidiary, TSC. TSC has joined with Deutsche Bank to launch a joint research project with the goals of expanding TSC’s customer base and recovering brokerage market share. The cooperation enhanced TSC’s competitive position as a local premium brokerage firm. TSC’s market share in the stock brokerage business improved from 3.36% in 2003 to 3.54% in 2004, or seventh ranking during 2003‐2004. In 2005, the unfavorable stock market turnover cut TSC’s brokerage market share to 2.96% but TSC was able to recover market status in 2006, and its share rose to 3.21%. TSC’s market share slightly declined to 3.01% in 2007 then sagged to 2.62% and 2.54% at the


end of 2008 and 2009, respectively. The successive falls were the result of the global financial crisis as well as an increase in competition among securities firms. By the end of 2010, TSC’s market share rebounded to 2.69%, or 15th ranking among 35 Thai brokerage firms. Its share continued to rise to 2.75% for the first two months of 2011, due to the favorable economic environment. TSC’s average brokerage commission rate was around 0.24% during 2006‐2009, but fell to 0.21% in 2010 because of the sliding commission scale scheme implemented by the Securities and Exchange Commission (SEC) in January 2010. TSC’s securities brokerage fees, however, increased by 29%, from Bt547 million in 2009 to Bt706 million in 2010. The lower fees were more than offset by higher trading values in 2010. TSC has also achieved its objective of diversifying its client base. In 2010, 51% of TSC’s brokerage volume was contributed by institutional investors (down from 60% in 2007), followed by 31% from individual investors (up from 28% in 2007), 17% from internet trading (up from 11% in 2007) and 1% from other sources.

Chart 4: TSC’s Securities Brokerage Market Share and Ranking

7 7

11

1314

1615 15

3.36%3.54%

2.96% 3.21% 3.01%2.62% 2.54% 2.69%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%0

2

4

6

8

10

12

14

16

18

2003 2004 2005 2006 2007 2008 2009 2010

% Market ShareRank Source: TRIS Rating

Asset management business generates 8% of total revenue TISCOASSET operates the asset management

business. TISCOASSET manages the various kinds of funds including provident funds, mutual funds, and private funds. Apart from the benefits of cross‐selling within the TISCO Group, asset management is one of the major sources of non‐interest income for TISCO. In 2010, the revenue from the asset management business was Bt609 million, up from Bt574 million in 2009. In terms of market share, TISCO Asset Management had a 4.7% market share in 2010, ranked seventh with a total net asset value (NAV) of Bt137 billion. As of December 2010, the NAV across all asset management firms in Thailand reached Bt2,885 billion, of which about Bt2,032 billion were contributed by mutual funds, Bt573 billion by provident

funds and Bt280 billion by private funds. TISCOASSET was highly‐ranked in the areas of provident funds and private funds. During 2006‐2010, TISCOASSET was one of the top three firms in terms of NAV of provident funds, with market share of 13.5%‐14.7%. TISCOASSET’s ranking and market share in private fund management improved from sixth at the end of 2002, with a 4% market share, to second at the end of 2010, with a 15% market share. For mutual funds, TISCOASSET’s market share was only 0.9% of total net asset value at the end of 2010.

Limited distribution networks

TISCO has established a banking platform which focuses on the business areas in which it has expertise, its chosen market niches, and its chosen market opportunities. TISCO’s business network and distribution channels are limited when compared with its peers. As of December 2010, TISCO offered banking services and hire‐purchase lending through 45 branches of TISCOB (22 branches in Bangkok and 23 branches upcountry), four branches of TISCOL, 48 Automated Teller Machines (ATM) and 32 Electronic Teller Machines (ETM, for non‐cash transactions). TISCO provided securities brokerage and fund management services through its Bangkok headquarters, one Bangkok office, and four provincial securities offices. However, TISCO is trying to benefit from improved synergy across the Group. TISCO has continuously developed and expanded its market channels by utilizing the internet channel, and by adding its own ATMs and ETMs. TISCO has also joined the ATM pools nationwide. In addition, TISCO has increased the number of convenient cash access points for retail customers by joining with post offices nationwide under the “Pay at Post” program for cash transactions such as deposits and making cash payments. TISCO plans to increase its business network by adding more branches. TISCOL will expand from four to 20 branches within 2011 as the Group expands.

ASSET QUALITY

Very good asset quality is supported by prudent risk management system TISCO’s asset quality has improved significantly. The

TISCO Group has a good risk management system which includes these aspects: an efficient credit granting policy, risk management overseen by a risk manage‐ ment committee, and timely credit collection and debt restructuring processes. As a result, TISCO’s ratios of consolidated NPL to total loans and the consolidated non‐performing assets (NPA, defined as classified loans more than three months past due, plus the outstanding balance of restructured debts, and foreclosed property) to total assets were the lowest among all 11 Thai universal banks.


At the end of December 2010, TISCO’s consolidated NPL to total loans ratio was 1.8%. The ratio has improved continuously from 4.3% in 2007, 2.9% in 2008, and 2.5% in 2009, and is far better than the industry average of 4.7%. Furthermore, TISCO’s ratio of consolidated NPA to total assets continually declined from 6.5% in 2007 to 3.8% in 2008, 3.1% in 2009 and 2.4% in 2010. This ratio is also far lower than the industry average of 8.6% for 11 Thai universal banks in 2010. These track records and statistics indicate TISCO has asset quality superior to its peers.

Adequate cushion of capital funds and allowance for doubtful accounts According to TISCO’s conservative risk management

policies, the company has a policy to provide a reserve for counter‐cyclical business factors, which are determined based on the long‐term average value of business risk. As a result, on a consolidated basis, TISCO’s allowance for doubtful accounts was 260% of the minimum level required by the BOT regulations. This amount is significantly above the industry average of 155% for 11 Thai universal banks. Moreover, TISCOB’s ratio of NPA to total capital funds plus allowance for doubtful accounts was only 0.19 times. The ratio improved from the values of 0.38 times in 2008 and 0.24 times in 2009. The current value of the ratio is much better than the average ratio of 0.61 times for 11 Thai universal banks. The conservative risk management policies and low levels of impaired assets provide sufficient cushion against any deterioration in loan quality arising from adverse changes in the business environment.

Chart 5: Ratio of NPA to Capital Fund Plus Allowance for Loan Loss for Thai Banks

0.0

0.2

0.4

0.6

0.8

1.0

1.2

TISCO KK TCAP BAY Avg 11 Banks

Avg Small‐4 Banks

0.4

0.8

0.6

1.1

0.8

0.5

0.2

0.6

0.4

1.0

0.8

0.4

0.2

0.6

0.8

0.6 0.6

1.0

2008 2009 2010

(Time)

Source: TRIS Rating

Remarks: Small 4 banks are TISCOB, KK, CIMBT and ICBCT.

PROFITABILITY

The TISCO Group has provided various kinds of financial services with high efficiency and consistent profitability, as a result of its good risk management

practices and efficient organization. The ability to generate returns on loans and investments, maintain good quality assets, diversify the revenue base, as well as control costs by streamlining operating systems, is crucial to the Group’s enhanced profitability.

Profitability continued to improve TISCO’s financial performance has significantly

improved. On a consolidated basis, TISCO reported net income of Bt2,888 million in 2010, up by 45% from Bt1,988 million in 2009. The growth was driven by an increase in both interest income and non‐interest income. TISCO’s consolidated interest spread has continually improved, climbing from 3.32% in 2008 to 4.4% in 2009 and 4.55% in 2010. TISCO’s higher interest spread arose because its funding cost fell faster than the decline in interest yield. Non‐interest income also rose, climbing by 35% from Bt2,873 million in 2009 to Bt3,876 million in 2010. The increase was mainly due to a rise in fee income from securities brokerage, fund management and banc‐assurance services. At the end of 2010, the ratio of net interest and dividend income to total income was 53.8%, up from 42.8% in 2008 and 52.7% in 2009. The proportion of fees and commission income to total income rose from 20.2% in 2008 to 20.4% in 2009 and 21.8% in 2010. TISCO’s ROAA in 2010 was 1.86%, up from 1.5% in 2009, while its ROAE in 2010 improved from 16.53% in 2009 to 21.1% in 2010, the highest level in the banking industry.

Efficient control of the operating cost

Chart 6: Operating Expenses to Total Income of Thai Banks

0

5

10

15

20

25

30

35

40

45

50

TISCO KK TCAP BAY Avg 11 Banks

Avg Small‐4 Banks

33 3437

43

40 3939

33

38

46 4542

3740

42

4846

442008 2009 2010

(%)

Source: TRIS Rating

TISCO’s operating expenses were Bt4,989 million, up

12% from Bt4,461 million in 2009, mainly from higher personnel and staff expenses in 2010, following an increase in the number of staff. In addition, advertising and promotion expense increased as the company needed to build brand awareness because of the intense competition in the banking industry. The increases in


personnel expense and advertising expense in 2010 were 34% and 156%, respectively. However, in terms of efficiency, TISCO’s ratio of operating expenses to total income was 37% in 2010, down from 39% in 2009 and also far below the industry average of 46% for 11 Thai universal banks. The low level reflects TISCO’s effective control of its operating costs. The operating costs were low due in part to the low level of premises and equipment expenses because TISCOB has a small branch network.

FUNDING/LIQUIDITY

Borrowings and deposits are the main sources of funds As of December 2010, TISCO’s stand‐alone funding

comprised Bt3,345 million in bills of exchange (B/E) and Bt15,274 million in shareholders’ equity. On a consolidated basis, TISCO’s funding totaled Bt165,009 million at the end of 2010. The funding structure comprised borrowings (55%), deposits (29%), shareholders’ equity (9%) and interbank and money market borrowings (7%).

Chart 7: TISCO’s Consolidated Funding Structure

29%

7%55%

9%Deposits

Interbank

Borrowings

Equity

Source: TISCO Short‐term maturity gap was alleviated by high

rollover rate of public borrowings On a consolidated basis, TISCO’s public borrowings

(deposits and B/Es) accounted for 85% of total liabilities as of December 2010. TISCO’s ratio of loans to public borrowings was 114%, the highest level in the banking industry, and far above the industry average of 93% for 11 Thai universal banks. In addition, TISCO’s consolidated asset‐liability structure was mismatched in terms of duration. Nevertheless, the maturity mismatch was alleviated by a rollover rate of more than 90% for its public borrowings.

Unforeseen outcomes from DPA implementation According to the DPA scheme, the amount of deposit

protection will be reduced from unlimited protection to a maximum of Bt50 million in August 2011 and then Bt1 million in August 2012. Any unforeseen outcomes arising after the DPA takes effect may influence TISCOB’s ability to maintain its strengths and secure stable sources of funding at reasonable prices. Nevertheless, TISCO has put strategies and action plans in place to prevent any adverse effects.

CAPITALIZATION Adequate capitalization

TISCO is well capitalized. The company officially adopted the Basel II Standardized Approach (SA) for its regulatory capital calculation of credit risk in June 2010, while TISCOB has utilized the Basel II IRB approach to calculate the regulatory capital since December 2009. At the end of 2010, TISCO’s total capital funds were Bt17,172 million on a fully consolidated basis. TISCO’s total capital adequacy ratio (BIS ratio) and Tier‐1 capital adequacy ratio (before an adjustment of the capital floor) were 12.80% and 7.63%, respectively. These values are far above the minimum requirements set by the BOT of 8.50% and 4.25%, respectively. TISCO’s base of capital funds is considered sufficient to support future expansion plans. TISCO plans to implement the IRB approach at the end of 2012. IRB is a more appropriate risk measure as it reflects the inherited risk profiles of assets more effectively than the capital requirement based on the SA.

Chart 8: Capital Adequacy Ratio of Thai Banks

7.63

11.23

12.4611.29

14.9315.69

14.55

8.02

8.65

11.7112.35

11.55

11.5410.71 11.34

11.17

5.17

0.48

4.50

3.94

0.490.60

0.63

3.16

5.45

3.04 2.592.60

4.30

3.31

4.22 4.2512.8011.71

16.96

15.23 15.4216.29

15.18

11.18

14.1014.75 14.94

14.15

15.84

14.02

15.55 15.42

0

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4

6

8

10

12

14

16

18

2008

2009

2010

2008

2009

2010

2008

2009

2010

2008

2009

2010

2008

2009

2010

2008

2009

2010

TISCO (Full Consolidation)

TISCOB (Solo Basis)

KK (Solo Basis)

TBANK (Solo Basis)

BAY (Solo Basis)

AVG 11 Banks (Solo Basis)

BIS Ratio (%) Tier 2 Tier 1

Source: TRIS Rating


Financial Statistics*

Unit: Bt million

* Consolidated financial statements ** Including interbank and money market

‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ Year Ended 31 December ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 2010 2009 2008 2007 2006

Total assets 171,408 138,804 126,173 98,953 84,781

Investment in securities 6,481 9,438 5,355 5,781 4,393

Loans and receivables 151,159 114,366 103,914 87,982 75,452

Allowance for doubtful accounts 4,162 2,425 1,855 2,806 2,794

Deposits 48,536 56,808 58,823 35,714 40,568

Borrowings** 101,617 65,509 52,396 46,602 28,239

Shareholders' equity 14,857 12,519 11,536 12,374 12,683

Net interest and dividend income 7,205 5,981 4,162 3,488 2,806

Bad debts and doubtful accounts 1,933 1,548 980 695 (50)

Non‐interest income 3,876 2,873 2,134 2,444 2,293

Operating expenses 4,989 4,461 3,234 2,948 2,947

Net income 2,888 1,988 1,714 1,651 1,546


Key Financial Ratios* Unit: %

* Consolidated financial statements ** Including brokerage fees *** Including bills of exchange n.a. Not available

‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ Year Ended 31 December ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 2010 2009 2008 2007 2006

Profitability

Net interest and dividend income/average assets 4.64 4.51 3.70 3.80 3.51

Non‐interest income/average assets 2.50 2.17 1.90 2.66 2.87

Fees and services income**/total income 21.82 20.35 20.17 19.40 19.20

Operating expenses/total income 37.24 39.32 33.27 31.40 36.85

Operating profit/average assets 2.68 2.15 1.85 2.49 2.75

Return on average assets 1.86 1.50 1.52 1.80 1.93

Return on average equity 21.10 16.53 14.34 13.18 12.00

Asset Quality

Non‐performing loans/total loans 1.76 2.45 2.87 4.26 4.57

Non‐performing assets/total assets 2.39 3.06 3.78 6.49 7.52

Bad debts and doubtful accounts/average loans 1.46 1.42 1.02 0.85 (0.07)

Allowance for doubtful accounts/total loans 2.75 2.12 1.78 3.19 3.70

Capitalization

Shareholders' equity/total assets 8.67 9.02 9.14 12.50 14.96

Shareholders' equity/total loans 9.83 10.95 11.10 14.06 16.81

BIS ratio 12.80 n.a. n.a. n.a. n.a.

Liquidity Total loans/deposits*** 114.25 105.96 102.76 122.04 129.15

Deposits***/total liabilities 84.52 85.47 88.21 83.27 81.03

Total loans/total assets 88.19 82.39 82.36 88.91 89.00



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 Issuer has weak capacity for meeting its short‐term obligations. D 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 the fundamental creditworthiness of the company. The rating outlook will be announced in conjunction with the credit rating. In most cases, the outlook of each debt obligation is equal to the outlook assigned to the issuer or the obligor. The categories for “Rating Outlook” are as followed: 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.


TRIS Rating Co., Ltd. Tel: 0‐2231‐3011 ext 500 / Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand www.trisrating.com

TRIS Rating Co., Ltd. Office of the President, Tel: 0‐2231‐3011 ext 500 / Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand www.trisrating.com

© Copyright 2011, 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. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.

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