TRIS Rating Co., Ltd. has assigned the company rating of Capital Nomura Securities PLC (CNS) at “BBB+” with “stable” outlook. The rating reflects CNS’s experienced and conservative management, its large capital base, and the brand equity as well as the support associated with being a part of the Nomura Group. The rating also takes into consideration CNS’s recent strategic move to set up new branches outside Bangkok by allying with the Small and Medium Enterprise Development Bank of Thailand (SME Bank). The rating is, however, constrained by the increasingly competitive operating environment, the high volatility of the Thai stock market, and the uncertain outcomes after brokerage fees were fully liberalized in January 2012. The “stable” outlook reflects the expectation that CNS will maintain its conservative style of management and continue to receive support from the Nomura Group. In addition, TRIS Rating expects CNS to be able to strengthen its market position as it expands and to maintain an adequate risk management system to control the credit risk in margin lending.
TRIS Rating reported that CNS’s market share in securities brokerage is not particularly high but it has been quite stable over the last few years. Intense price competition after the implementation of the sliding scale commission scheme cut CNS’s market share slightly in 2010, but the company started to regain market share in the second half of 2011. CNS’s share in securities brokerage rose to 2.6% in 2011, up from 2.4% in 2010. In derivatives brokerage, the market share remained low at 1.4% in 2011.
TRIS Rating said, until recently, CNS operated only a few branches, located only in Bangkok. In 2011, CNS started to expand to provincial areas for the first time, in collaboration with the SME Bank. The main purpose of the expansion is to tap the wealth of investors outside Bangkok for its unit trust selling agent business and to expand its retail client base in the brokerage business. CNS also aims to capture opportunities to provide investment banking services to SME Bank’s clients. It may take a few years to realize the benefits of this strategic move, but the downside risk is limited. The investment needed for the expansion as well as the operating expenses for the new branches are relatively small.
Besides having the privilege of using the “Nomura” brand, being a part of the Nomura Group provides CNS with steady brokerage trading volume flow from Nomura’s global network. Around 5% of CNS’s brokerage fees came from this channel in the last few years. There is also research collaboration among affiliated companies within the group, which helps add value to CNS’s research products. Moreover, CNS has entered the agreements with several affiliated companies within the Nomura Group to provide various kinds of financial services. Revenues based on these agreements make up a significant portion of CNS’s fees and services income.
CNS has limited exposure to market risk as it does not engage in speculative proprietary trading. CNS also has an excellent track record of controlling the credit risk of margin lending, incurring almost no losses over the last 10 years. However, the recent and rapid expansion of margin loan portfolio may raise some risk management challenges. Its margin loan portfolio stood at Bt2.8 billion as of 30 November 2011, compared with Bt1.9 billion and Bt0.8 billion as of 30 November 2010 and 2009, respectively. TRIS Rating expects CNS to continue to be able to control the credit risk of the margin loans by strictly enforcing margin calls and forced sales, and by maintaining its stringent criteria on collateral.
CNS has a large amount of available credit through credit facilities from several financial institutions. This amount should be enough to cover the expansion of its margin loan portfolio and other temporary liquidity shortfalls. Of the total amount of credit in the credit facilities, a significant proportion was provided by an affiliated company within the Nomura Group.
Net profit of CNS almost doubled to Bt217 million in FY2011, from Bt117 million in FY2010, mainly as a result of higher market trading volume. Total revenues jumped 35% to Bt1,004 million in FY2011 from Bt742 million in FY2010. CNS has been able to keep its operating expenses at a competitive level and its profitability has been in line with peers of similar size.
CNS’s shareholder equity totaled Bt3.6 billion as of 30 November 2011, ranking CNS among the top 10 largest brokers in terms of equity base. The net capital ratio (NCR) has been historically strong for CNS. It stood at 195% as of 31 August 2011, which was much higher than the regulatory requirement of 7%, said TRIS Rating. — End
Company Rating: BBB+ Rating Outlook: Stable
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