The Trinidad and Tobago Mortgage Finance Company Limited

Transcription

1 CREDIT RATING REPORT The Trinidad and Tobago Mortgage Finance Company Limited September 30, 2013 TYPE OF RATING Issuer Rating RATING ASSIGNED Foreign Currency Local Currency National Scale CariAA- CariAA- ttaa- RATING HISTORY Date Foreign Currency Local Currency National Scale September 20, 2013 CariAA- CariAA- ttaa- August 24, 2012* CariAA- CariAA- ttaa- * Initial rating RATING DRIVERS Strengths Strong position in the residential mortgage market Good operating efficiency Healthy financial performance Good asset quality and adequate provision coverage Weaknesses Lack of a dedicated risk management unit Limited diversity in the funding mix and high funding costs Small capital base and limited access to additional capital Rating Sensitivity Factors A change in the implied level of support from the GORTT A material adverse change in the conditions of the T&T residential mortgage sector Significant loss of market share A sharp deterioration in asset quality A material increase in financial leverage Analytical Contacts: Andre Joseph Tel: Ext ajoseph@caricris.com Paul Birchwood Tel: Ext pbirchwood@caricris.com Website: info@caricris.com Disclaimer: CariCRIS has taken due care and caution in compilation of data for this product. Information has been obtained by CariCRIS from sources which it considers reliable. However, CariCRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. No part of this report may be published / reproduced in any form without CariCRIS prior written approval. CariCRIS is also not responsible for any errors in transmission and especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this product. 1

2 COMPANY BACKGROUND Trinidad and Tobago Mortgage Finance Company Limited (TTMF) was incorporated under the Companies Act on December 3, It was derived from an agreement between the Commonwealth Development Corporation (formerly Colonial Development Corporation) and the Government of the Republic of Trinidad & Tobago (GORTT), and succeeded the Trinidad Mortgage Agency Company Limited (TRINMAC), a limited liability company that was formed in TTMF is jointly owned by the GORTT and the National Insurance Board (NIB) in a current shareholding ratio of 49%:51% respectively. TTMF was incorporated to fulfill the GORTT s mandate of providing affordable residential mortgage financing for low to middle-income households in T&T. It is the lead vehicle for mortgage financing under the GORTT s Approved Mortgage Company Programme (AMCP). It is also a key part of the State s housing business model in which the Trinidad and Tobago Housing Development Corporation (HDC) constructs the housing, and TTMF provides the mortgage financing. Although the HDC refers potential homeowners to the TTMF, they can obtain financing from other institutions. The company s product range includes conventional residential mortgage loans and home equity loans with tenors of up to 30 years at stable interest rates, currently ranging between 5% and 7% per annum. As at May 2013, open market 1 loans represented 53.4% of its mortgage asset pool, followed by AMCP loans at 25.4%, HDC loans at 18.3%, and other mortgage pools at 2.9%. 1 Non-GORTT assisted loans to the general public 2

3 RATING RATIONALE Caribbean Information and Credit Rating Services Limited (CariCRIS) has reaffirmed its issuer ratings of CariAA- (Foreign and Local Currency) on its regional rating scale, and ttaa- on the Trinidad and Tobago (T&T) national scale of the Trinidad and Tobago Mortgage Finance Company Limited (TTMF). These ratings indicate that the level of creditworthiness of this obligor, adjudged in relation to other obligors in the Caribbean 2 and within T&T is high. The ratings include a 1-notch upgrade for implied support by the Government of the Republic of Trinidad and Tobago (GORTT), given the GORTT s 49% ownership stake in the company, as well as the strategic role TTMF plays in the GORTT s housing policy. The factors supporting these ratings are: Strong position in the residential mortgage market TTMF is a well-known residential mortgage finance provider in the T&T mortgage market. In December 2012, it accounted for the second largest share of the overall residential mortgage market with 17.5%, behind the market leader s estimated 24.3%. TTMF s mortgage product range is comparable with those offered by the commercial banks. Although it was traditionally perceived to be a financier for first time homeowners, it offers conventional residential mortgage loans and home equity loans with tenors of up to 30 years to both first time and existing homeowners. Its low negotiation fees, free mortgage pre-qualification services and generally stable mortgage rates 3 (currently ranging between 5 7% and 2% in the case of a specific partially subsidized mortgage programme 4 ) are some of the comparative advantages enjoyed by the company. 2 The term Caribbean as used here covers the following countries: The Bahamas, Barbados, Belize, Costa Rica, The Dominican Republic, Guyana, Haiti, Jamaica, Panama, Suriname, Trinidad and Tobago and the following countries in the OECS: Anguilla, Antigua & Barbuda, Dominica, Grenada, Montserrat, St. Kitts & Nevis, Saint Lucia and St. Vincent & the Grenadines. Refer for a more detailed explanation on CariCRIS ratings and rating definitions 3 Although TTMF reserves the right to vary the interest rates on its mortgages at any time, this is not frequently done 4 The GORTT provided a grant of TT $200 million to TTMF to assist with loans made under this programme, which is directed at households earning less than TT $8,000 per month 3

4 TTMF was incorporated to fulfill the GORTT s mandate to provide affordable mortgage financing. It plays a key part of the GORTT s housing business model, in which the stateowned Trinidad and Tobago Housing Development Corporation (HDC) constructs housing for low to middle income earners, with TTMF providing the mortgage financing. The GORTT also established the Approved Mortgage Company Programme (AMCP), under which TTMF is an approved lender. Interest income from loans made under this programme is tax exempt. Although several of the local commercial banks are also qualified to give AMCP loans, their participation in this segment is limited due to their preference for less stable interest rates, as well as a higher level of administrative cost associated with the periodic portfolio reports that must be submitted to the GORTT. Consequently, TTMF dominates this segment. TTMF also offers mortgage loans to the open market, which includes high-income earners, and is considered to be an area of growth for the firm. Although the company s marketing budget and branch network 5 are smaller than those of the larger commercial banks, it is strategically located in the key business centres of the country. Its smaller budget and branch network disadvantages are also partially offset by its use of referrals from existing customers and the HDC, and its adoption of direct sales and marketing strategies such as the execution of road shows to various groups and organizations. The company also leverages its relationships with real estate agents and developers to win business. In April 2013, TTMF launched its Fixed at 6 advertising campaign to the general public, which offered mortgage financing to qualifying customers at a fixed rate of 6% per annum. The campaign was a success, with the value of new mortgage requests exceeding the original budget. CariCRIS is of the view that favourable demand/supply conditions in the residential real estate market augur well for the continued growth of TTMF. Good operating efficiency At 47.4% in 2012, TTMF s operating efficiency, as measured by its cost to income ratio, was the second best in CariCRIS regional peer sample 6. The efficiency ratio averaged 44.3% for the period , well below the regional sample average of 60.6%. This favourable operating efficiency is attributable to growth in total income, which averaged 10.2% for the past 3 years, compared to the increase in operating expenses which grew by an average rate of 8.9%. Personnel costs, which averaged 59.9% of total operating expenses over the period, grew by an 5 Including its head office TTMF has branches in 5 locations across T&T, these being Port of Spain, Arima, San Fernando, Chaguanas and Tobago. 6 The sample comprises a total of 14 financial institutions, 2 in Jamaica, 6 in T&T, 2 in Barbados and 4 in the Organization of Eastern Caribbean States 4

5 average of 12.4%. In 2012, personnel costs grew by 17.3% to TT $28.6 million, largely due to a partial payment to staff for retroactive salary increases for the period Approximately 75% of TTMF s staff is unionized, with collective bargaining agreements re-negotiated every 3 years. This creates some unevenness in personnel expenses at the start of each new triennium. Labour relations in the company are generally cordial, although there is a wage disagreement with the union for the bargaining period currently before the Industrial Court. Over the last two 2 years TTMF has been upgrading its IT infrastructure. The existing infrastructure is 99% reliable with no system failures or unscheduled downtime being recorded in the last year. These investments include an upgrade to the existing computer hardware as well as to its core banking system. The upgrades are expected to further enhance operating efficiencies by improving workflow, data collection and reporting. Healthy financial performance The company realized its 3 rd consecutive year of revenue growth in Net interest income (NII) rose by 2.9% to TT $94.8 million from TT $92.1 million in This growth offset a 13% decline in fee income to TT $6.7 million, and a 30.1% reduction in other income to TT $1.5 million. Total income increased marginally by 1% to TT $103 million. TTMF s 3-year average return on assets (ROA) ratio of 1.9% was marginally above the sample average of 1.6%. In 2012, its ROA was 1.8%, declining slightly from 2% in Profit after tax (PAT) contracted by 7.6% in 2012 to TT $63 million from TT $68.1 million the prior year. The company reported a moderate 3-year average growth rate of 10.4% for PAT. Revenue growth was somewhat tempered by the company s low net interest margin (NIM 7 ), which remained unchanged from 2011 at 2.9%. TTMF s 3-year average NIM of 2.8% was the 3 rd lowest in the peer group, with the sample average being 4.6%. Chart 1 below shows the profitability of the firm for the last 5 years. 7 Net interest income / average interest earning assets 5

6 Chart 1 PAT and ROA ( ) TT $' % Financial Year 0.0 PAT ROA Source: TTMF Financial Statements The company s net interest spreads have been widening moderately since 2010, increasing to 1.5% in 2012 from 1.3% in However, its 3-year average spread of 1.2% was well below the sample average of 4.6%. TTMF s income sources are moderately diversified, with NII representing 92% of total income in Other sources of income include fee income and other income which represented 6.5% and 1.5% respectively of total income. Unlike some of its regional peers, TTMF derives all of its income from T&T. Over the last 3 years, the company has reported tax credits averaging TT $11 million, with a credit of TT $9.8 million in The corresponding deferred tax asset on the balance sheet grew by 7.4% to TT $173 million as at December Given the increasing proportion of TTMF s earnings from open market loans, CariCRIS expects the value of future tax credits to diminish at a moderate pace going forward. Good asset quality and adequate provision coverage TTMF s asset quality is amongst the best in the regional peer sample. In accordance with the Central Bank of Trinidad and Tobago (CBTT) Guideline for the Measurement, Monitoring and Control of Impaired Assets, TTMF recognizes mortgage loans in arrears 180 days and over as 6

7 non-performing. Based on this guideline, TTMF s asset quality as measured by the level of nonperforming loans (NPLs) to total loans averaged 1.4% for the last 3 years, compared to the regional average of 5.1%. In December 2012, NPLs fell by 3.8% to TT $38.4 million from TT $39.9 million in December 2011, while the ratio of NPLs to total loans fell marginally to 1.3% from 1.4% the previous year. However, when loans past due more than 90 days are included, the ratio of NPLs to total loans is slightly higher than the sample average, and increasing year on year (y-o-y) to 5.5% from 4.4% in December Notwithstanding this increase, CariCRIS considers the overall portfolio quality to be good. The level of concentration within the mortgage portfolio is low, with the top twenty (20) mortgages representing just 1.6% of the total portfolio. Table 1 below shows the level of impaired assets in the mortgage portfolio and provisioning coverage for the last 5 years. Table 1 TTMF s Loan Portfolio Quality Year Performing Loans TT $'000 Non-Performing Loans* (NPLs) TT $'000 % of Gross Loans TT $'000 Provisions % of NPLs ,962,126 38, , ,894,239 39, , ,768,859 40, , ,576,497 52, , ,231,032 20, , Source: TTMF * Comprised of loans in arrears 180 days and over The company s provision coverage of NPLs has been increasing for the last 2 years, with further improvement anticipated for During 2012, provisions increased by 10.5% to TT $10.2 million, with the ratio of provisions to NPLs rising to 26.5% from 23.1% in December Management intends to increase provisions by a further TT $3 million for 2013, and this is expected to further enhance the NPL coverage ratio. Improvement notwithstanding, provision coverage of 26.5% for 2012 was below CariCRIS sample average of 40.5%. In addition to its loans, the company has a relatively small investment portfolio, of which almost 100% is comprised of fixed income securities issued by T&T state-owned enterprises and valued at TT $251.3 million in December Given its composition, CariCRIS considers the 7

8 assets in this portfolio to be of good credit quality. The company is not exposed to currency risk as all assets and liabilities are TT$ denominated. Tempering TTMF s good asset quality is its lack of diversity in its loan portfolio, as 100% of loans are made to the real estate sector of a single country. Furthermore, its single largest investment security, which accounted for 89.5% of the investment portfolio in December 2012, was issued by a large T&T-based housing developer. Although real estate mortgage loans have performed strongly with an average 3-year growth rate of 12.1%, it nonetheless exposes TTMF to significant concentration risk when compared to regional peers. TTMF is also exposed to interest rate risk due to its practice of fixing loan rates. While the company reserves the right to change the rate of interest on its mortgage loans, it does not usually do so even when interest rates rise. These rating strengths are tempered by: Lack of a dedicated risk management unit TTMF does not have a risk management unit. As such, the General Manager of Mortgage Services has primary responsibility for credit origination, the approval of loans of up to TT $1.5 million and the administration of the loan portfolio. Approval for loans above TT $1.5 million must be sought from the Managing Director or Board of Directors (BOD). Furthermore, with the exception of bridging loans, performing loans are not reviewed until they fall into arrears. All delinquent loans are reviewed monthly. Despite the lack of a risk management unit the company has a conservative overall risk management philosophy. Risk is managed at the senior management and BOD levels. In order to attain approval, a mortgage applicant must have a maximum debt service ratio of 33.3% of gross income inclusive of the monthly installment of the proposed mortgage and a maximum debt service ratio of 40% inclusive of all monthly installments. Furthermore, TTMF in its Mortgage Services Underwriting Policy, has indicated that the loan to value ratio for mortgages is 90% and in some instances 95%. In the case of real estate developments, TTMF does not lend to more than 40% of a development. In an effort to grow the open market portfolio, the company removed the TT $2 million loan ceiling it previously maintained in order to pursue higher value lending. Although this move has increased the company s competitiveness in the local residential mortgage market, it will also increase the level of risk being undertaken. 8

9 During 2012, the company began the development of a new Enterprise Risk Management (ERM) policy. This policy is designed to remove the current silo approach to risk management by increasing information flows between departments, thereby improving management s oversight of TTMF s operations. The policy groups risk into 4 major categories, namely Strategic, Financial, Operational and Reputational. It clearly identifies the officers responsible for each overall and sub-category. A risk scoring scale was established, and specific risk measurement metrics are currently being devised. The policy would be supported by the new core banking system, and is expected to be fully implemented in CariCRIS believes that the successful completion of this project will greatly enhance TTMF s risk management function going forward. Limited diversity in the funding mix and high funding costs TTMF is primarily funded by bonds and long-term loans which in December 2012 represented 61.9% of its total interest bearing liabilities, up slightly from 61.6% in December The company is unable to accept deposits, which represent a relatively cheaper source of funding, putting it at a disadvantage compared to a commercial bank. Within the last year, TTMF has adopted a more dynamic funding mix, including the use of short-term debt such as commercial paper, of which it issued TT $247 million earlier in In June 2013, the company hired a Treasury Officer to assist with the management of its funding mix. The company s 3-year average funding cost of 5.9% was well above the sample average of 2.8%. During 2012 and continuing into 2013, the company refinanced TT $1.1 billion of its debt (approximately 44% of its funding base as at June 2013). This has allowed TTMF to reduce its average cost of funding and to better compete with the commercial banks on lending rates. However, the commercial banks will continue to enjoy greater agility in adjusting their lending rates due to their reliance on deposit funding; this is proving to be of benefit to them in the currently soft interest rate environment. As at December 2012, the majority of TTMF s borrowings were at fixed rates, reducing the company s flexibility to reset its lending rates should interest rates decline further. Finally, the company does not have systemic support from the CBTT nor the interbank market in the case of distress. In the event of a crisis TTMF could sell mortgages in the secondary market although this market has been fairly inactive. While the GORTT has provided assistance in the form of subsidies to TTMF to fund specific programmes that are in keeping with the national housing policy, TTMF borrows on the strength of its own balance sheet and does not usually seek guarantees from the GORTT. 9

10 Small capital base and limited access to additional capital TTMF s tangible net worth (TNW) is small relative to several regional peers. In December 2012, TNW grew by 6% to TT $717.5 million, however it remains below the regional average of TT $2.9 billion. The small capital base renders the company more vulnerable in absolute terms to capital shocks than its larger Caribbean peers. As a privately owned limited liability company, TTMF has very limited access to additional capital. Despite its small size, TNW provides relatively comfortable coverage to total assets, averaging 19.7% for the last 3 years, better than the regional peer average of 15.6%. TTMF accretes more profits to retained earnings by adopting a moderate dividend payout policy, which limits dividends to a maximum of 40% of profit before tax. Such a policy has allowed the company to increase its reserves by a minimum of 60% of PBT each year. Despite the absence of a stated policy, gearing has been fairly moderate, averaging approximately 3.6 times in the last 3 years. The GORTT has signaled its intention to combine the operations of TTMF with the Home Mortgage Bank (HMB) to create the Trinidad and Tobago Mortgage Bank (TTMB) by the end of 2013, and plans to offer a portion of its shares in this new entity for sale on the local stock exchange. Such a move would likely strengthen the company s capital base, and grant it access to the public to raise additional capital if required. The due diligence on this proposed merger is currently ongoing, and the structure of the new enterprise is yet to be announced. Rating Sensitivity Factors A change in the implied level of support from the GORTT A material adverse change in the condition of the T&T residential mortgage sector Significant loss of market share A sharp deterioration in asset quality A material increase in financial leverage 10

11 FINANCIAL PERFORMANCE Table 2 Summary Annual Financial Performance 2012^ TT$ '000 Equity Capital 12,408 12,408 12,408 12,408 12,408 Tangible Net Worth* 717, , , , ,155 Total Assets* 3,480,314 3,389,677 3,379,061 3,321,540 2,672,926 Total Income 103, ,047 86,754 77,510 80,467 Total Operating Expenses (incl. Depreciation) 48,882 42,071 38,319 38,045 39,864 Profit After Tax (PAT) 62,969 68,112 59,716 47,928 48,117 % Interest Rate Spreads Total Expenses/Total Income PAT/Average Total Assets Tangible Net Worth/Adjusted Assets Gross NPLs/Gross Loans Source: TTMF Financial Statements ^ Financial year runs from January 1 to December 31 * Tangible Net Worth and Total Assets do not include intangible assets, revaluation reserves or goodwill September