TRIS Rating Co., Ltd. has affirmed the company and current senior debenture ratings of Kiatnakin Bank PLC (KK) at “A-”. At the same time, TRIS Rating has assigned a rating of “A-” to KK’s proposed issue of up to Bt3,000 million in senior debentures with “positive” outlook. The ratings reflect the improvement in KK’s business and financial profiles, experienced management team, acceptable risk management practices, improving asset quality, and strong level of capital funds. However, the ratings are constrained by the bank’s moderate franchise value, limited distribution network compared with larger banks, and the uncertain movements in private savings caused by a drop in the amount of insured deposits, in accordance with the Deposits Protection Agency Act (DPA). Furthermore, KK’s future business growth and profitability might be affected by the changing economic and political environments, as well as intense competition in both the banking and securities businesses. The “positive” outlook reflects the expectation that KK will be able to continue growing and sustain its profitability in the medium term. The outlook also reflects the bank’s ability to control asset quality and maintain a level of capital funds sufficiently to absorb any downside risks arising from uncertainties in the economic and financial environments. Three major concerns remain: the possible effects from the recent heavy floods in Thailand, the risk of an unstable retail deposit base caused by the full implementation of the DPA in August 2012, and a possible rise in the cost of funds. KK’s abilities to sustain its strengths and to secure stable sources of funds at reasonable prices have yet to be proved.
TRIS Rating reported that KK was ranked 11th among 15 Thai commercial banks in terms of total assets, with 1.6% market share in assets, 1.7% in loans, and 1.0% in deposits as of September 2011. KK’s core businesses in hire-purchase lending, residential project lending, and distressed asset management are well managed, with high levels of management expertise. Asset quality remains under control. Supported by rising domestic vehicle sales and economic growth during the first nine months of 2011, KK’s loan portfolio expanded by 21% to Bt130 billion. Of the total, 74% was hire-purchase lending, while 26% was residential project loans and others. As of September 2011, auto hire-purchase lending rose by 25% to Bt96 billion, compared with Bt77 billion in 2010. Loans for real estate and construction increased by 12%, from Bt21 billion in 2010 to Bt23 billion at the end of September 2011.
In December 2011, KK signed a Memorandum of Agreement for a merger with Phatra Capital PLC (PHATRA). PHATRA was ranked eighth among 33 active brokers in terms of trading volume in 2011. KK plans to make a tender offer for shares of PHATRA by issuing new ordinary shares of the bank to swap with PHATRA’s shareholders. The tender offer will take place during the second and the third quarter of 2012. Once the merger is successful, KK should have a greater competitive edge in security brokerage services. The operating performance of KK could rise if the bank and its affiliates can generate more fee-based income. However, the immediate benefits after the merger completion are not expected to be significant enough to change KK’s credit profile.
As KK has a strategy to expand by focusing on good quality assets, the bank has imposed more stringent credit policies and underwriting criteria. KK’s non-performing loans (NPL) have consistently fallen. The ratio of NPL to total loans substantially improved, tumbling from 12.3% of total loans in 2007 to 4.6% in 2010. The NPL ratio has continued to decline, and slid to 3.7% by the end of September 2011, which was better than the industry average of 4.0% for the 11 Thai universal banks (excluding four Thai non-listed banks) in TRIS Rating’s database. At the same time, non-performing assets (NPA; classified loans more than three months past due, plus outstanding troubled debt being restructured and foreclosed property) were 6.4% of total assets, better than the industry average of 7.0%. KK has made loans to sub-prime residential developers. These loans are considered as high credit risk. The bank’s NPL ratio for loans to the real estate and construction sectors remained high at 14% as of September 2011, above the industry average of 8%. However, KK maintains an adequate cushion of capital and allowances for doubtful accounts to absorb the risks from the NPA. The ratio of NPA to capital funds plus the allowance for doubtful accounts was 0.44 times, which was better than the industry average of 0.53 times. In addition, the bank’s ratio of allowance for doubtful accounts to NPLs increased to 95% from 85% in 2010. Despite the rise, the value is still below the industry average of 100%. KK may face a rise in NPLs in the aftermath of the heavy flooding in Thailand which came at the end of 2011. However, the increase in NPLs is expected to be temporary and manageable.
TRIS Rating said, KK has been able to generate more income and sustain the high yield from its core businesses, while successfully controlling its operating costs. In 2010, KK reported a net profit of Bt2,840 million, up 27% from Bt2,229 million in 2009. Although the ratio of operating expenses to total income increased from 30% in 2009 to 38% in 2010, it remained lower than the industry average of 42%. KK’s return on average assets (ROAA) rose to 2.1% in 2010 from 1.8% in 2009, while the return on average equity (ROAE) also increased, rising to 14.6% from 12.7%. For the first nine months of 2011, KK reported net profits of Bt2,176 million, falling 7.4% year-on-year (y-o-y), and its non-annualized ROAA and ROAE values were 1.3% and 10.0%, respectively. The falls were mainly caused by more provisions for loan losses and higher personnel expenses compared with the same period of 2010. KK’s future profitability may be affected by the regulations requiring an increase in the regulatory fee charges based on deposits and bills of exchange (B/E). The cost of funds may rise because of a mandated increase in the fees paid by the bank to the Bank of Thailand (BOT), in order for the BOT to repaying the debt burden of the Financial Institutions Development Fund (FIDF).
In terms of liquidity and funding, KK is exposed to some level of liquidity risk, as the bank had a maturity mismatch for assets and liabilities with less than 12 months duration. KK also relies on wholesale funding, which tends to be a more volatile funding source. As of September 2011, KK’s funding structure comprised B/Es, accounting for 50% of total deposits and B/Es, time deposits (44%), and current and savings deposits (CASA, 6%). However, KK has a strategy to increase the number of retail accounts in an effort to diversify and stabilize its sources of funding. The upcoming reduction of the maximum amount of insured deposits, from Bt50 million to Bt1 million in August 2012, may affect KK’s financial strength and the stability of its funding sources.
KK has a strong capital base, as illustrated by a capital adequacy ratio of 15.50% at the end of September 2011, up from 15.18% in 2010. The bank’s equity to asset ratio dropped slightly to 12.3% from 14.7% in 2010, as the result of the expanding loan portfolio. However, the ratio remained above the industry average of 9.4%. As KK engages in high risk-high return lending, especially for residential project loans, it is crucial for the bank to maintain a strong capital base and stringent allowances for doubtful accounts. The capital base and allowances can absorb unexpected losses from future downside risks, said TRIS Rating. - End
Company Rating: Affirmed at A- Issue Ratings: KK127A: Bt2,493 million senior debentures due 2012 Affirmed at A- KK12OA: Bt2,000 million senior debentures due 2012 Affirmed at A- KK16DA: Bt975 million senior debentures due 2016 Affirmed at A- KK187A: Bt240 million senior debentures due 2018 Affirmed at A- KK18DA: Bt625 million senior debentures due 2018 Affirmed at A- KK18DB: Bt10 million senior debentures due 2018 Affirmed at A- Up to Bt3,000 million senior debentures due within 2014 A- Rating Outlook: Positive
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