Summary of Overall Economic Conditions and Outlook for Specific Sectors in 2016 and Credit Rating Business Overview for 2015

Thursday 12 May 2016 16:00
TRIS Rating's President, Ms. Watana Tiranuchit, organized a press conference to summarize the overall economic conditions and outlook for specific sectors in 2016, and provided an overview of the credit rating business in 2015

Economic brief for 2015 and 2016 outlook

The Thai economy grew slower than expected in 2015 increasing merely 2.8%. Though the growth rate in 2015was higher than that of 2014, it was still lower than the Thai economy's potential growth rate. From 2013 to2015, real gross domestic product (GDP) grew by an average of 2.1% per annum compared with the average growth rate of 4.5% between 2000 and 2012. The GDP growth in 2015 reflected positive contributions from the increase of net exports of goods (40%) and net exports of services (27%). Public investment spending contributed about 18% to GDP growth in 2015. The rise in net exports of services income was consistent with the rapid growth of the number of tourist arrivals. On the contrary, the increase of merchandize trade surplus reflected the lower oil price and paralyzed domestic economic activities that made imports declined faster than the drop of exports. The disappointing economic growth rate in 2015 was the result of shrinking export values, low agricultural product prices and farm income, lackluster private consumption, and the delay of large public investment projects.

TRIS Rating found that industrial sectors partially affected by the economic slowdown include: residential property development, wholesale and retail trades, automobile producers and related businesses such as auto hire purchase. During the same period, the agricultural sector also suffered from low product prices, domestically and overseas. Agricultural producers that focus on exports such as seafood including tuna and shrimp are facing more challenging factors such as the increasing trade sanctions in terms of higher production standards from major importers, a recovering but still low global agricultural product price level, declining demand and fierce competition from other exporters.

Economic indicators in the first quarter of 2016 reflect marginal improvements of private consumption and farm product prices. Nonetheless, government stimulus packages and the commencement of mega construction projects are still needed to encourage domestic consumption and investment in the private sector. Lackluster performance of businesses located in provinces also signaled a slowing down of purchasing power for local people in remote areas. The fast growth of personal loans should cause higher non-performing loans over the medium to long-term if non-bank financial institutions do not implement prudent credit risk management.

The Thai economy in 2016 is expected to remain weak with marginal growth in the range of 2.7% to 3.0%. Major growth-supportive factors include the effectiveness of government policies to stimulate domestic consumption, the ability of the government to launch a number of large infrastructure projects into real construction activities and the recovery of agricultural product prices. The negative factors that are expected to continue in the rest of 2016 include the slow economic recovery for Thailand's trading partners, particularly China, ASEAN and Japan, the increasing trade sanctions from America and Europe against export agricultural products from Thailand, the effects of drought and unfavorable weather conditions affecting crop products.

Banking: Neutral to Negative Outlook

The banking system's loan growth is expected to slow further in 2016. Profitability will maintain or gradually decline from the previous year. With the sluggish economic conditions since 2013, high household debt and high corporate leverage has caused increasing levels of bad debt, and has consequently limited commercial banks' profitability due to higher bad debt provisioning expenses. Unaudited performance of listed commercial banks for 1Q2016 has shown a continual decrease in profitability.

Outstanding loans for the commercial banking system reported by the Bank of Thailand showed slower growth rates from 11% in 2013 to 5% and 4% in 2014 and 2015, respectively. Outstanding loans

for corporate clients in 2015 remained almost unchanged from 2014, while outstanding loans for SME and retail segments grew by 6%. NPL ratios increased from 2.2% in 2014 to 2.6% in 2015. The NPL ratios in 2015 increased for all market segments, being at 1.6%, 3.5% and 2.6% for corporate, SME and retail segments, respectively.

Listed commercial banks reported a continual decline in return on average earning assets to 1.65% in 2015 from 1.98% in 2013 and 1.86% in 2014. Credit costs rose from 0.7% in 2014 to 1% in 2015. However, commercial banks have maintained strong capital funds, sufficient to absorb future downside risks.

TRIS Rating expects loan growth of commercial banks at around 3%-5% in 2016, supported by Government stimulus measures and investment expansion in infrastructure and mass transit projects. Profitability continues to be pressured by higher bad debt provision. Asset quality deterioration is a key concern being closely monitored.

Nonetheless, stringent credit risk management, a strong capital base (Capital Adequacy Ratio = 16.6% as of December 2015) and prudent regulatory supervision should be able to mitigate potential risks of the banking industry amid an economic downturn in the medium term.

As of 11 May 2016, there are 6 commercial banks rated by TRIS Rating. The ratings range from "A-" to "AAA" including BAY (AAA/Stable), Mega ICBC (AA+/Stable), TBANK (AA-/Stable), TISCOB (A/Stable), KKP (A-/Stable) and LH Bank (A-/ Positive Alert). The rated holding companies of commercial banks are TCAP (A+/Stable) and TISCO (A-/Stable).

Auto Hire Purchase: Neutral Outlook

This industry is expected to slow further in 2016, a consequence of the First Car Buyer Scheme (1.25 million units). The scheme encouraged excessive demand and increased household debt burdens. The profitability will maintain or gradually decline from the previous year. With the slowing economic conditions since 2013, high household debt and high corporate leverage have caused increasing levels of bad debt, and consequently limited profitability due to higher bad debt provisioning expenses. There was an over supply in used car markets, which dampened used car prices by 30%-35% for two consecutive years starting in mid-2013. In addition, with slower economic growth since 2013, bad debts markedly increased and profitability decreased due to high bad debt expenses.

Outstanding loans for auto hire purchase in 2015 for 20 operators in TRIS Rating database totaled Bt1.9 trillion, a 0.6% recovery from a 1.8% drop in 2014, compared with a high growth rate of 38% in 2012 and 21% in 2013. At the same time, NPL ratios for auto hire purchase loans rose from 1.2% in 2013 to 2.2% in 2014, and maintained around 2.2% in 2015.

TRIS Rating expects slower economic growth in 2016 and low levels of used car prices will limit growth of auto hire purchase loans. Asset quality is likely to maintain or gradually decline after most operators made huge write-offs and recorded a significant credit costs during 2014 and 2015. However, asset quality deterioration is a key concern being closely monitored.

As of 11 May 2016, there are 8 operators rated by TRIS Rating. The ratings range from "BBB-" to "AAA". These operators included three commercial banks; TBANK (AA-/Stable), TISCOB (A/Stable) and KKP (A-/Stable). Other non-bank finance companies are Toyota Leasing (Guaranteed debentures AAA/Stable), AYCAL (AA-/Stable), ASK (BBB+/Stable), THANI (BBB+/Stable) and ML (BBB-/Stable).

Agricultural: Neutral to Negative Outlook

Signs of recovery are starting to emerge for some agricultural products after falling prices have eroded earnings during the past few years. For the sugar business, sugar prices worldwide have picked up since the third quarter of 2015. The El Niño effect cut sugar production of some major producing countries including China, Thailand, and India in the 2015/2016 crop year. Sugar production in Brazil, the largest sugar exporter worldwide, also declined because of heavy rain and more sugar being used to produce ethanol. As a result, the global sugar balance in 2015/2016 is forecasted to be the first year of sugar deficit in six years. However, Thai sugar producers will be challenged by the unfavorable weather in Thailand, which reduces cane output and crushing yield. The sugar production in Thailand is projected to fall to approximately 10 million tonnes, a 10% drop from 11.34 million tonnes of sugar produced in 2014/2015. The recovery in profit and cash flow generation would be curbed by the rising cost and falling sugar volume.

Currently, TRIS Rating rates three sugar producers. Mitr Phol Sugar Corporation Limited is rated A+ with a stable outlook. Khon Kaen Sugar Industry PLC is rated A with a stable outlook and Buriram Sugar PLC is rated BBB- with a stable outlook.

For the livestock industry, supply glut in poultry and swine has thrown the poultry and swine industry into a cyclical downturn in 2015. In 2016, the livestock producers will benefit from lower grain costs and a gradual recovery in poultry and swine prices. Strong export demand for poultry remains a bright spot for the industry. In 2015, Thailand exported chicken products totaling 681,073 tonnes, a 17.5% increase over the same period in the prior year. As a result, profitability and cash flow generation of operators is expected to sequentially improve in 2016.

Currently, TRIS Rating rates two livestock producers. Charoen Pokphand Foods PLC is rated A+ with a stable outlook. Betagro PLC. is rated A with a stable outlook.

For the seafood industry, the challenge remains with the illegal, unreported, and unregulated (IUU) fishing issue, an EU framework which is aimed at preventing unlawful fishing. The EU is considering whether Thailand meets the conditions for IUU fishing. If Thailand does not meet IUU standards or EU determines a failure to comply with the framework, the EU will ban all fishery products from Thailand. Shrimp products in Thailand are mostly farmed shrimp, but farmers use fishmeal from fishing vessels as one of the feed components. If the EU bans fishery products and shrimp imports from Thailand, shrimp exports to the EU would plunge. In 2015, Thailand exported 10% of total seafood export to the EU totaling Bt20,791 million. One positive development in the seafood sector has been the recovery from the EMS plague, which cut shrimp production in Thailand more than 50% in 2013-2014. It is projected that shrimp production will increase by 10% to 290,000 tonnes in 2016. However, the operators still encountered a market risk as the tax privileges under Generalized Scheme of Preferences (GSP) for shrimp export to the EU ended in 2014 and 2015.

Currently, TRIS Rating rates two seafood processors. Thai Union Group PLC is rated AA- with a stable outlook. CFRESH Industry PLC is rated BBB with a stable outlook. Both companies are expected to experience a limited impact from the IUU if the EU decides to impose an import embargo on seafood products from Thailand as they have diversification in market and production base to mitigate the risk.

Mobile Communication: Neutral to Negative Outlook

The mobile communication market in Thailand is quite saturated with the number of subscribers declining to 83.0 million as of 2015, from 97.0 million as of 2014, due largely to the mandatory registration of SIM cards. Mobile penetration rate stood at 123.5%. Demand for mobile data has heightened, chiefly caused by technology changes impacting consumer behavior and more affordable handsets. This results in a higher proportion of non-voice services revenue earned by operators. Going forward, the use of mobile phones for the purposes other than customary communication (e.g. entertainment, e-commerce, mobile banking) will grow steadily.

Within this saturated and price-sensitive market, competition among mobile operators remains intense. Mobile operators continually employ various sales promotions to gain market share. Moreover, the fast-growing demand for mobile data has urged operators to secure their network coverage, as evidenced by the highly competitive auctions for 1800 MHz and 900 MHz licenses which eventually resulted in much higher-than-expected license prices.

Looking ahead, operators will remain pressured by high license costs, further coverage expansion needs, and heavier debt loads while their performance will be constrained by stiff competition and regulatory requirements lowering service charges. These factors stand to restrain credit ratings.

At present, TRIS Rating assigns credit ratings to four mobile operators, namely Total Access Communication PLC (AA+/Stable), dtac TriNet Co., Ltd. (AA+/Stable), True Corporation PLC (BBB+/Stable), and True Move H Universal Communication Co., Ltd. (BBB+/Stable).

Residential Property Development: Neutral Outlook

TRIS Rating maintains a "neutral" outlook on the residential property development sector for 2016. Sales in the Bangkok Metropolitan Area (BMA) are expected to grow slightly while sales in the provincial areas remain sluggish due to the expected severe drought and low crop prices. Rated developers still target higher income homebuyers and investors in BMA since commercial banks remain cautious about high household debt levels and are quite strict about lending to low-income clients. The government's effort to stimulate housing demand by using the state-owned banks to provide soft loans to first-time homebuyers, for buying housing units priced at less than Bt1.5 million, should improve market sentiment in the short to medium term. However, planned government investments in infrastructure projects are expected to be the major catalyst to boost the domestic economy and help revive housing demand in the long run.

Property prices have remained high and keep rising, especially in downtown areas, driven by significant growth in land prices even though construction material and labor costs remain stable. However, the profitability of several developers is expected to decline since higher discounts and/or sales promotions may be needed to accelerate the transfers. Competition is going to increase in all price segments, given sluggish sales growth in the low-price segment and higher supply in the high-price segment. Some rated developers shifted their target to foreign buyers in several countries, especially Taiwan, Hong Kong, Singapore, and Mainland China.

Currently, TRIS Rating rates 19 residential property developers. The ratings range between BB+ and A+. Due to strong presales in 2012-2013, revenues of rated developers still grew in 2015. However, TRIS Rating observes deteriorating credit metrics in this sector. The profitability of many rated developers declined while leverage remained high. The backlog of these developers stood at around Bt240,000-Bt250,000 million at the end of 2015, marginally higher than the prior year. Most of TRIS Rating's rated residential property developers have a "stable" outlook. TRIS Rating downgraded one issuer in 2015, while in the first quarter of 2016, TRIS Rating downgraded two issuers and upgraded one issuer.

Tourism: Positive Outlook

Thailand's tourism industry has great potential with attractive destinations and low costs relative to neighboring countries. Economic growth in recent years in the region, especially in China, has strongly pushed up demand for tourism in Thailand, mitigating the impact from the domestic economic and political problems as well as the occurrence of a natural disaster. Income from foreign tourists has increased rapidly, up from 5% of GDP in 2010 to 11% of GDP in 2015. Foreign tourist arrivals reached 30 million in 2015, with one-fourth of tourists coming from China.

Revenues of most hotel operators in 2015 were higher than in 2014 when the industry was hit by political problems. Listed operators generated 8% higher sales in 2015, with operating profit margins largely unchanged at 21%. The debt to equity ratio increased to 0.87 in 2015 as major operators continued expansion.

TRIS Rating rates three hotel operators, Minor International PLC (MINT – A+/Stable), Central Plaza Hotel PLC (CENTEL – A/Stable), and Dusit Thani PLC (DTC – BBB+/Stable).

Credit Rating Business in 2015 and 2016

The President of TRIS Rating noted that TRIS Rating gained 29 new customers in 2015, an increase from 20 in 2014 highlighting the continued growth of the credit business. At present, TRIS Rating's customer base includes 141 publicly disclosed ratings of corporations, state-owned enterprises, financial institutions, and a sovereign.

Total long-term corporate bond issuance reached Bt572,424 million in 2015, slightly increasing from Bt568,887 million in 2014. During the first four months of 2016, corporate bond issuance was Bt202,371 million compared with Bt136,834 million over the same period of 2015. In 2016, TRIS Rating expects that new corporate bond issuance to be in the range of Bt550,000-Bt580,000 million. Low interest rate environment continues to encourage many corporations to lock-in long-term funding costs for either expansion or debt refinancing. The majority of the issuance is contributed by the sectors in property development, telecommunication, building materials, food, and transportation as well as bank and non-bank financial institutions.