Thai Military Bank this May blazed a way forward for its country ahead of implementation of Basel II in 2008 with the first Thai hybrid bond to be sold internationally. Adam Harper talks to TMB's chief financial officer, Tanate Phutrakul, about the international markets, mergers and politics.
Few industries were hit as hard by the Asian financial crisis as the banking sector in Thailand. As the baht crashed and the economy collapsed, the country's lenders were left broken and were forced into a painful restructuring process.
"After the crisis our non-performing loan ratio was very high at almost 40%," says Tanate Phutrakul, chief financial officer at Thai Military Bank in Bangkok. "Today, our non-performing loan ratio is around 12% and our plan is to reduce that to 8% by the end of the year, which will be more in line with the Thai banking sector."
TMB, Thailand's fifth largest bank, returned to profitability in 2004, the same year that it merged with DBS Thai Danu Bank and the Industrial Finance Corp of Thailand.
With the nation's banking industry returning to health — the top six banks recorded an aggregate 19% increase in profit last year — Phutrakul says it became clear that the domestic markets alone could no longer meet TMB's growing capital requirements.
TMB started to look at products it could sell in international markets. "We are not unfamiliar with issuing hybrids, having done them in the domestic market before," he says. "Part of the reason we came into the international markets was that we had a domestic hybrid worth approximately $125m that was due and we wanted to replace it.
"It's part of an overall funding plan for us — we want to raise Bt18bn-Bt20bn ($475m-$528m) of tier one and doing all that through common equity would be too dilutive for us."
To bring the first international hybrid from a Thai issuer, however, TMB and its lead managers, Barclays Capital and DBS, had to develop a radical structure — a process that is understood to have taken six months from mandate to pricing. When marketing the perpetual non-call 10 year deal, the leads' main challenge was to help investors understand the circumstances under which coupon payments could be deferred under the Bank of Thailand's rules for tier one, issued in February.
In South Korea, Singapore and Malaysia, issuers can defer coupon payments on hybrid tier one if they do not pay an equity dividend. In Thailand, however, many profitable banks have negative retained earnings on their balance sheets dating from the Asian financial crisis in 1997-1998, and are prohibited from paying dividends while these remain.
Instead, Thai tier one issuers face a forward-looking profit test. TMB must decide 30 to 60 days before the end of its financial year on December 31 whether it intends to announce a loss for the full year. If it does this, it has the option — but not the obligation — to defer coupon payments on the hybrid bonds.
TMB executives are understood to have assured investors that the bank would not stop making coupon payments even if it did expect a loss.
Despite widespread misunderstanding of the deal and some tricky market conditions, TMB eventually completed its $200m perpetual non-call 10 deal at the beginning of May. The capital injection relieved immediate pressure on the lender, says Phutrakul, and a planned Bt10bn rights issue will ease it further.
"At the beginning of the year, our capital adequacy ratio was at 9% and the regulatory minimum is 8.5%, so we were fairly constrained." he says. "After the hybrid it was 10.5% and with the rights issue it will be 12.5%, which is very healthy compared to other Thai banks."
TMB's CFO is confident that the hybrid could well lead on to further issues. "Our view of the international capital markets was that they were uncompetitive compared to the local markets," he says. "But that changed at the beginning of the year when the Bank of Thailand began to increase rates. I imagine we will access the international markets again, although we have no immediate plans this year."
Looking ahead, Phutrakul is keen that the bank should generate more of its earnings from fee income and other business lines where it does not have to use its balance sheet. Indeed, TMB already has an equity investment banking and brokerage joint venture with Macquarie.
With increasingly deregulated markets across Asia, many banks in the region are facing up to further consolidation, although Phutrakul does not think TMB would necessarily have to merge again. "We are of sufficient scale to compete and we will continue to grow organically," he says. "Having said that, we have been through a merger already and we will not shy away from a merger that enhances our earnings."
He is also adamant that an economic slowdown in the second half of the year can only be avoided if the political vacuum that has existed since prime minister Thaksin Shinawatra's hollow victory in boycotted elections in April is filled.
"If that is resolved fairly quickly in terms of having elections and forming a permanent government, the impact of the slowdown should be manageable, but the deadlock needs to be resolved," he says.