TRIS Rating Co., Ltd. has assigned the rating to the proposed issue of up to Bt240 million in senior debentures of Kiatnakin Bank PLC (KK) at “A-”. At the same time, TRIS Rating has affirmed the company rating of KK and the ratings of KK’s existing senior debentures at “A-”. The outlook remains “positive”. The ratings reflect KK’s improvement in business and financial profile, experienced management team, acceptable risk management and practices, good track record of improving asset quality, and strong capital fund. Although KK has been more diversified in retail funding base, the ratings are constrained by its limited franchise value and unforeseen risks impacted by the Deposits Protection Act (DPA) implementation, which will be effective in 11 August 2011. In addition, uncertainty of economic and political environments and intense competition in both banking and securities businesses might limit KK’s business growth and profitability in the future.
The “positive” outlook reflects the expectation that KK will be able to sustain business growth and profitability in the medium term. The outlook also reflects the bank’s ability to control asset quality and maintain sufficient capital funds to absorb downside risks due to uncertainty of economic and financial environment in the future. Unforeseen risks of unstable retail deposit base due to the DPA implementation is still a major concern in 2011-2012. The rating would be reviewed after TRIS rating evaluates the impact of DPA implementation in August 2011. An upgrade would take into consideration KK’s ability to sustain its strengths and to secure its stable funding at a reasonable price after the DPA implementation.
TRIS Rating reported that KK was ranked 9th in terms of assets, with a 1.5% market share in assets, 1.6% in loans and 1.2% in deposits as of December 2010. KK’s core businesses in hire purchase, residential project lending, and distressed asset management are well managed with high expertise and under controllable asset quality. Supported by a two-digit growth of domestic vehicle sales and an economic growth in 2010, KK’s loan portfolio expanded by 24% to Bt108,313 million. Of the total, 71% was hire purchase lending, 29% was the residential project loans and others. As of December 2010, auto hire purchase lending rose by 28% to Bt77,020 million, compared with Bt60,119 million as of December 2009. At the same time, loans for real estate and construction increased by almost 8%, from Bt19,160 million to Bt20,607 million.
TRIS Rating said, as KK has the strategy to focus more on expanding good-quality assets, the bank has imposed more stringent credit policy and underwriting criteria. KK’s non-performing loans (NPL) had consistently reduced since 2007. The ratio of classified loans (sub-standard, doubtful, and doubtful loss) to total loans, therefore, improved tremendously from 13.3% in 2005 to 3.6% in 2010, which was better than the average of 6.0% for the 11 universal banks. However, classified loans with more than three months pass due from loans for real estate and construction sectors was 16% of total loans for these sectors, while the industry average NPL for these sectors was 10%. As of March 2011, the NPL ratio continued to decline to 3.1%, compared with the average of 5.7% for the 11 universal banks.
KK’s non-performing asset (NPA) (classified loans with more than three months pass due, and the outstanding amount of troubled debt being restructured and foreclosed property) was 8.96% of total assets, which approached to an average of 8.57% for the 11 Thai universal banks. KK’s ratio of allowance for loan losses to NPLs was 109%, higher than the industry average of 91% for the 11 universal banks in 2010. Although KK extends loans to sub-prime residential developers which are high credit risk assets, KK maintained adequate cushion of capital and allowances for doubtful accounts to absorb risks from a certain rise in NPAs. The ratio of NPA to capital fund plus allowance for doubtful accounts was 0.55 times, which was better than an average of 0.61 times for the 11 universal banks.
KK was able to generate better income and sustain high yield from its core businesses, while succeeding in controlling of its operating cost. In 2010, KK reported net profits of Bt2,840 million, up 27% from Bt2,229 million in 2009. The ratio of operating expenses to total income increased slightly to 35% from 33% in 2009, far lower than the industry average of 46% for the 11 universal banks. KK’s return on average assets (ROAA) also rose to 2.11% in 2010 from 1.84% in 2009, while the return on average equity (ROAE) also increased to 14.62% from 12.69%. For the first quarter of 2011, KK reported net profits of Bt609 million, and its non-annualized ROAA and ROAE were 0.41% and 2.79%, respectively.
On the funding side, KK’s strategy to increase numbers of retail accounts with a smaller amount of deposits was reflected by an increase in a portion of savings deposits to 6% of total deposits as of December 2010 from 0.7% of total deposits as of December 2008. KK had a strong capital fund, as shown by its BIS ratio of 15.18% at the end of 2010. As KK engages in high risk-high return lending, especially residential project loans, maintaining strong capital fund and allowance for doubtful accounts is crucial to absorb unexpected losses from future downside risks, said TRIS Rating. -- End
Company Rating: Affirmed at A- Issue Ratings: KK119A: Bt1,450 million senior debentures due 2011 Affirmed at A- KK127A: Bt2,493 million senior debentures due 2012 Affirmed at A- KK12OA: Bt2,000 million senior debentures due 2012 Affirmed at A- Up to Bt240 million senior debentures due within 2018 A- Rating Outlook: Positive
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