TRIS Rating Co., Ltd. has affirmed the company rating and the ratings of Krungthai Card PLC’s (KTC) current senior debentures at “BBB+”. At the same time, TRIS Rating assigns “BBB+” rating to KTC’s proposed issue of up to Bt10,000 million in senior debentures. The outlook remains “stable”. The ratings take into consideration the strong financial and business support from its parent company, Krung Thai Bank PLC (KTB), which holds a 49.45% stake in KTC. KTC’s financial profile has substantially weakened due to a huge operating loss in 2011. However, a big part of the loss was caused by certain extraordinary expenses incurred in the last quarter of 2011. KTC’s franchise in credit cards remains strong and its personal loan portfolio has been growing. On the other hand, the continued deterioration in asset quality throughout 2011, which worsened after the flood in the fourth quarter, remains a cause for concern. KTC has implemented several measures to improve the efficiency of its loan collection procedures and reduce customers’ delinquency rate. TRIS Rating will closely monitor the improvement in KTC’s asset quality. The ratings are also constrained by KTC’s less competitive cost of funds, the increasingly competitive operating environment, and regulatory risk, which might further affect the industry’s growth potential and profitability.
The “stable” outlook reflects the expectation that KTC will be able to improve its asset quality and achieve stronger overall financial performance within 2012. TRIS Rating also expects that KTB will continue to provide financial and business support to KTC.
TRIS Rating reported that KTC had a net loss of Bt1,621 million in 2011. While the loss caused a sharp drop in its equity base and may affect the company’s borrowing capacity, more than half of the loss was not driven by poor business performance. The reduction in corporate tax rate, from 30% to 23% in 2012 and finally to 20%, resulted in the recognition of Bt404 million deferred tax expense in 2011. In addition, to prepare for the adoption of Thailand Financial Reporting Interpretations No. 13 “Customer Loyalty Program” (TFRI 13), KTC decided to ramp up its provision for credit card reward points in 2011. The TFRI 13 is expected to be in effect in 2013, with a requirement for retroactive adjustment. The additional provisions for credit card reward points amounted to Bt838 million, on a pre-tax basis. This move made KTC’s total provision large enough to cover much higher redemption rate of the reward points awarded to its credit card clients.
TRIS Rating said, spending by KTC cardholders grew from Bt87.9 billion in 2010 to Bt93.6 billion in 2011, representing 12.2% and 11.5% market share, respectively. Despite the growth in spending, gross credit card receivables shrank from Bt35.7 billion in 2010 to Bt33.7 billion in 2011, due to continued shift in the client mix towards more transactors (convenience users). The number of outstanding cards fell from 1.73 million in 2010 to 1.62 million in 2011. The fall was due mainly to KTC’s policy in 2011 to terminate inactive cards in an effort to reduce operating expenses. In the personal loan business, KTC’s gross receivables grew, in line with the industry, from Bt11.4 billion in 2010 to Bt12.7 billion in 2011, representing 6.1% and 6.0% market share, respectively.
However, asset quality did deteriorate in 2011, even before the flood. The overall delinquency rate (over 90 days past due) climbed to 5.2% at the end of 2011, from 4.0% a year earlier, before jumping to 6.3% at the end of the first quarter of 2012 as the effects from the flood were fully realized. Net charge-off rate jumped to 10.0% in 2011, up from 6.8% a year earlier. The rise was partly due to the extra allowance for doubtful accounts worth Bt633 million in 2011, provisioned in response to the expected rise in delinquency as a consequence of the flood. Despite the extra provision in 2011, the net charge-off rate remained high in the first quarter of 2012, at 2.3% (non-annualized). KTC reported a net loss of Bt155 million in the first quarter of 2012, with provisions for bad debts and doubtful accounts amounted to 42% of total revenues, compared with 36% in the same period of 2011. In the beginning of 2012, the company decided to bring the collection service back in-house under its full control. The improvement in the efficiency of collection is expected to help reduce delinquency rate. The company has also put more emphasis on pre-delinquent collections. TRIS Rating expects the asset quality to show signs of improvement in the second quarter of 2012.
With its ability to access a diverse funding base, plus the financial support it receives from KTB, short-term liquidity is not a major concern for KTC. Its portfolio was funded by borrowings from many financial institutions, and by debentures with a range of maturities. It has a credit line from KTB worth Bt18,030 million, which remained unutilized as of 31 March 2012. In addition to the funding support, KTC has been expanding by making use of KTB’s nationwide branch network. Around 20% of KTC’s new credit card and personal loan clients have been obtained through this channel over the last few years.
KTC relies on borrowings from financial institutions and the debt market as its main funding sources. Its commercial bank competitors, in contrast, have access to relatively cheap funding from deposit. The high funding cost partly offsets the strength of KTC’s franchise and makes it difficult for KTC to compete more aggressively and expand its market share. KTC’s average cost of funds in 2011 was 4.9%, almost unchanged from 2010, but rose slightly to 5.2% in the first quarter of 2012. Intensifying competition and the inability to tap the higher yield segment of the market due to certain regulations will continue to put pressure on KTC’s profitability, said TRIS Rating. — End
Company Rating: Affirmed at BBB+ Issue Ratings: KTC128A: Bt4,500 million senior debentures due 2012 Affirmed at BBB+ KTC129A: Bt300 million senior debentures due 2012 Affirmed at BBB+ KTC12OA: Bt220 million senior debentures due 2012 Affirmed at BBB+ KTC135A: Bt1,000 million senior debentures due 2013 Affirmed at BBB+ KTC135B: Bt1,000 million senior debentures due 2013 Affirmed at BBB+ KTC135C: Bt1,000 million senior debentures due 2013 Affirmed at BBB+ KTC13NA: Bt7,500 million senior debentures due 2013 Affirmed at BBB+ KTC14OA: Bt6,000 million senior debentures due 2014 Affirmed at BBB+ KTC15OA: Bt1,000 million senior debentures due 2015 Affirmed at BBB+ Up to Bt10,000 million senior debentures due within 2017 BBB+ Rating Outlook: Stable
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