TRIS Rating Co., Ltd. has affirmed the company rating of KT Zmico Securities Co., Ltd. (KTZ) at “BBB+” with “stable” outlook. The rating reflects KTZ’s sizable market share in both securities and derivatives brokerage, its presence in the Lao and Vietnamese markets through its affiliated securities companies, and the support it receives from Krung Thai Bank PLC (KTB), one of the two joint venture partners, which owns a 50% stake in KTZ. The rating also takes into consideration the potential benefits from further utilizing KTB’s nationwide branch network and business relationships to enhance KTZ’s market position. The rating is, however, constrained by the increasingly competitive operating environment, the high volatility of the Thai stock market, and the uncertainty from the full liberalization of brokerage fees beginning to take effect in 2012. The market risk associated with the company’s proprietary trading and the relatively large margin loan portfolio also affect the risk profile of the company. The “stable” outlook reflects the expectation that KTZ will continue to receive full support from KTB, that it will be able to maintain its market position in brokerage services, and that investment banking fees will comprise a larger portion of revenues, given KTZ’s experienced management and regional coverage. TRIS Rating also expects that KTZ will maintain an adequate risk management system to oversee its proprietary trading, margin lending, and activities related to the issuance of derivative warrants.
TRIS Rating reported that KTZ’s market share in securities brokerage in 2011 declined to 4.2% (ranked 11th) from 4.6% in 2010 (ranked 6th), as it lost trading volume from several large accounts. However, KTZ was able to maintain an average commission rate at around 20 basis points in 2010 and the first half of 2011. In derivatives brokerage, the market share also declined, sinking to 3.7% in 2011 from 4.2% in 2010.
KTZ has been expanding its retail client base using KTB’s branches. About 40% of KTZ’s new accounts in 2011 were acquired through referrals from KTB, up from less than 10% in 2010. Efforts have been made to communicate with KTB’s staff to make the cross-selling more effective. This support from KTB gives KTZ an advantage over other securities firms not affiliated with commercial banks. In addition to the business support, KTB also provides KTZ with financial support by granting credit lines for liquidity needs and to expand. Currently, KTB is providing over 80% of the credit facilities needed by KTZ, which is sufficient for KTZ’s current level of operations.
Despite a diverse retail client base, KTZ’s sources of revenues are to some extent concentrated in brokerage fees. Currently, KTZ has no recurring source of income from fund management but it is starting up a private wealth management service for which it charges management fee on assets under management. Investment banking revenues slowed down in 2011 but were quite large in 2010, partly as a result of providing services to BCEL-KT Securities Co., Ltd. (BCEL-KT), its associated company in Laos. KTZ is the first among the Thai securities firms to expand in Indochina, through BCEL-KT and through a strategic investment in Thanh Cong Securities Joint Stock Company (TCSC) in Vietnam by Seamico Securities PLC (ZMICO), the company’s other major shareholder. The first-mover advantage should give KTZ an edge over its local competitors for potential cross-border deals in the region. TRIS Rating expects to see investment banking revenue rising over the coming years.
TRIS Rating said, although KTZ became profitable after it acquired the securities operations from ZMICO in the second quarter of 2009, its profit margin has been thinner than peers of similar size. The ratio of operating expenses to total revenues was quite high at 73% in 2010, compared with the industry average of around 60%. With KTZ’s high operating expenses and reliance on brokerage fees, its profitability will be under pressure from the more intense price competition expected after the brokerage fees are fully liberalized in 2012.
KTZ’s margin loan portfolio was relatively large at Bt2.1 billion as of 30 June 2011. This represented around 8% of total industry-wide margin lending and around 110% of the value of KTZ’s equity. KTZ has also been active in proprietary trading, which exposes the company to market risk. KTZ’s share of industry-wide proprietary trading declined from 15% in 2009 to 9% in 2010 and to 5% in 2011.
As of 30 June 2011, shareholders’ equity stood at almost Bt2 billion. Due mainly to the growing margin loan portfolio, the level of financial leverage, as measured by the ratio of total assets to equity, has been rising over the last few years and was quite high at 2.6 times as of 30 June 2011. KTZ ended 2010 with a net capital ratio (NCR) of 50%, which was above the regulatory requirement of 7%, said TRIS Rating. — End
Company Rating: BBB+ Rating Outlook: Stable
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