TRIS Rating Co., Ltd. has upgraded the company rating of Bualuang Securities PLC (BLS) to “AA-” from “A-”. At the same time, TRIS Rating has revised the rating outlook of BLS to “stable” from “positive”. The upgrade reflects TRIS Rating’s expectation of a stronger level of support following the successful acquisition of BLS’s shares by its parent company, Bangkok Bank PLC (BBL), through a tender offer completed in March 2012. TRIS Rating also expects stronger business integration and synergy between BLS and the rest of the BBL Group. The rating is enhanced from BLS’s stand-alone credit profile to reflect its status as a strategically important subsidiary of the BBL Group. The stand-alone rating is based on BLS’s strong business profile with solid franchise in brokerage and investment banking, its conservative style of management, and the financial flexibility from being a subsidiary of BBL. The rating also takes into consideration the potential benefits from leveraging the BBL Group’s nationwide network and business relationships. However, the rating is constrained by the increasingly competitive environment, the high volatility of the Thai stock market, and the uncertainty surrounding the full liberalization of brokerage fees.
The “stable” outlook reflects the expectation that BLS will be able to utilize its franchise strength and support from the BBL Group to maintain its business and financial stability in the face of more intense competition and pricing pressure after the full liberalization of brokerage fees. The outlook also takes into consideration BLS’s conservative policies on margin lending and proprietary trading, as well as its continuing efforts to diversify its sources of revenues and expand its retail customer base.
TRIS Rating reported that BLS’s market position in securities brokerage remains solid, with a market share of 4.7% (ranked 8th in the industry) for the first eight months of 2012, compared with 4.8% (7th) in 2011 and 4.4% (9th) in 2010. Its share of industry-wide securities brokerage fees grew slightly from 4.8% in 2010 and 2011 to 5.0% in the first half of 2012. In derivatives brokerage, although BLS’s market share in terms of volume has been around 3%-4% for the past few years, its share of industry-wide fees was 6.5% in the first half of 2012, up from 5.5% in 2011 and 4.4% in 2010.
TRIS Rating said, revenue from investment banking has been strong, reflecting BLS’s ability to leverage its own track record and relationships with the client base of the BBL Group. BLS also has a fund management operation, which generates a stream of recurring income from fund management fees. However, this relatively stable source of revenue accounted for less than 2% of total revenues.
BLS has limited exposure to market risk, since it has a policy to engage in proprietary trading only for arbitrage purposes and only to hedge its positions in its derivative warrant (DW) business. BLS launched its first DW products in September 2010 and is currently the market leader in this segment. TRIS Rating expects the company to maintain an effective hedging and risk management system against its derivative liabilities. As for credit risk exposure, BLS’s margin loan portfolio stood at Bt535 million at the end of the first half of 2012, representing 25% of its own equity and 1.8% of industry-wide margin lending.
BLS can secure several benefits from being a subsidiary of BBL. Since the start of 2011 through the first half of 2012, almost one-fourth of BLS’s new brokerage accounts came through referrals from BBL, under the Introducing Agent Agreement established in 2007. More recently, BBL established the referrals and cross-selling of BLS’s products as one of the key performance indicators for its bank branch staff. BBL has long-standing relationships with many large business groups. Because of these relationships, BLS has an edge in servicing institutional brokerage clients through privileged corporate access, and an edge in securing investment banking transactions. These types of support give BLS an advantage over other securities firms which are not affiliated with a commercial bank. Moreover, BBL provides a large credit line to BLS, which accounts for more than 95% of all BLS’s available credit facilities.
As a part of the group’s strategy to strengthen its universal banking platform, BBL recently raised its shareholding in BLS from 56.34% to 99.75%. BBL aims to fully utilize BLS’s expertise in the capital market to provide the group’s clients with end-to-end financial services for all their funding and investment needs. In addition, with the larger stake in BLS, BBL can more efficiently manage the capital within the group and provide BLS with a larger amount of funding when needed.
BLS’s profitability has been strong relative to peers. Operating expenses remained under control, at 54% of net revenues in 2010 and 2011. Net profit amounted to Bt464 million in 2011, down slightly from Bt488 million in 2010. For the first half of 2012, net profit jumped 54% from the same period last year, and amounted to Bt320 million. The rise was mainly backed by strong gains related to DW products. As of 30 June 2012, shareholders’ equity stood at almost Bt2.2 billion. The degree of financial leverage has been relatively high, with the ratio of total assets to equity at 3.6 times as of 30 June 2012. The company ended 2011 with a net capital ratio (NCR) of 45%, compared with the regulatory requirement of 7%, said TRIS Rating. — End
Company Rating: Upgraded to AA- from A- Rating Outlook: Stable from Positive
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