TRIS Rating has affirmed the company and senior debenture ratings of Kiatnakin Bank PLC (KK) at “A-”. The outlook remains “positive”. The ratings reflect the improvements in KK’s business profile and financial position after the acquisition of Phatra Capital PLC (PHATRA). The ratings also reflect KK’s experienced management team and high level of capital funds. However, the ratings are constrained by the bank’s small market shares and its relatively limited distribution network, increasing funding costs, and transition risk during the post-acquisition integration period. Furthermore, KK’s future business growth and profitability might be affected by the changing economic and political environments, as well as intense competition in the banking, automobile hire-purchase, and securities industries. The “positive” outlook reflects the expectation that KK will be able to gain benefits from the post-acquisition integration so as to continue growing and sustain its profitability in the medium term. The outlook also reflects the bank’s ability to control asset quality, secure stable sources of funds at reasonable prices, and maintain a level of capital funds sufficient to absorb unexpected losses from future downside risks. TRIS Rating will be monitoring the transition when the bank reorganizes and restructures its business model.
KK is a small-sized bank, ranked 11th among 15 Thai commercial banks in terms of consolidated asset size, with 1.9% market share in loans, and 1.6% in deposits as of December 2012. KK’s core businesses in auto hire-purchase lending, residential project lending, and distressed asset management are well managed, given the experienced management team and its high level of management expertise. However, KK is exposed to loan concentration risk. At the end of 2012, the bank’s two major loan portfolios, hire-purchase lending (76%) and residential project loans (17%), comprised more than 90% of its total loan portfolio. In addition, KK has a latent credit risk exposure for lending to the small- and medium- sized enterprises (SMEs). Loans to SMEs, which are the main corporate customers of KK, are considered as medium to high credit risk loans. KK’s total loan portfolio has continually and rapidly expanded, rising at a compound annual growth rate of 21% during the past five years. As of December 2012, total loans reached Bt169.0 billion, thanks to the year-on-year (y-o-y) growth of 24.5%. KK’s strong growth was partially supported by rising domestic vehicle sales and a number of economic stimulus measures enacted by the Thai government.
As a part of its growth strategy, KK successfully acquired PHATRA and its subsidiaries, Phatra Securities PLC (PHATRA-SEC), effective on 13 September 2012. PHATRA-SEC, a wholly-owned subsidiary of PHATRA, is a Thai leading securities brokerage firm ranked 9th among 33 brokers in terms of trading volume in 2012. PHATRA-SEC has expertise in the capital market segment, including securities brokerage and investment banking services. As a consequence, KK is able to offer its client a full range of financial services, with a greater competitive edge in the capital market segment. Furthermore, KK-PHATRA Group’s sources of income will be more diversified by the large amounts of non-interest income generated from the capital market segment. During the post-acquisition consolidation period, KK will face transition risk as the bank reorganizes the group and management structures. KK’s business and financial profiles could further improve in the medium term should KK achieve the hoped-for benefits from group-wide synergies.
KK has a strategy to expand by focusing on good quality assets. To this end, the bank has improved its risk management system by imposing more stringent credit policies and underwriting criteria. Over the past three years during 2009-2011, KK’s total non-performing loans (NPLs) have consistently declined, falling from Bt5.4 billion in 2009 to Bt4.7 billion in 2011. Nonetheless, in 2012, NPLs rebounded to Bt5.6 billion, partly as a result of the heavy floods in Thailand in late 2011. Despite the rise in NPLs, the ratio of NPLs to total loans, or the NPL ratio, remained controllable. The NPL ratio declined from 6.2% in 2009 to 3.3% in 2012. The bank’s NPL ratio, however, remained high relative to its peers, and above the industry average. KK maintains an adequate cushion of capital funds in order to absorb the risks from the non-performing assets (NPAs; classified loans more than three months past due, plus restructured loans and foreclosed property). The ratio of NPAs to capital funds plus the allowance for doubtful accounts improved steadily, falling from 95% in 2009 to 44% in 2012.
KK’s financial position has improved. In 2012, KK reported Bt4.0 billion in the consolidated net earnings before corporate income tax, up by 18% y-o-y. Profit increased thanks to an increase in net interest income and non-interest income, as well as efficient control of its operating costs. Non-interest income rose substantially as a result of a large contribution from PHATRA and PHATRA-SEC. Return on average assets (ROAA) and return on average equity (ROAE) were 1.6% and 11.8%, respectively, up slightly from 1.4% and 9.8% in 2011. However, although KK has been able to sustain the high yields from its core businesses, its funding costs have been the highest level in the banking industry. The increasing cost of funds squeezed KK’s interest spread. In 2012, KK’s funding costs rose to 4.2%, affected by rising market interest rates due to intense competition for funds among lenders, as well as the new regulatory fee charges based on deposits and short-term borrowings. KK’s greater funding costs mirror its lower competitive edge and business franchise. KK may seek higher-risk and higher-return assets, which will give the bank a greater risk profile.
In terms of liquidity and funding, KK is exposed to some level of liquidity risk, as the bank has a maturity mismatch for assets and liabilities with less than 12-month duration. KK’s funding structure has been shifted to rely more on its deposit base, because the cost of issuing bills of exchange (B/Es) has increased. KK has been reliant on high net worth customers or wholesale funding, which are considered highly volatile funding sources. Nonetheless, KK has a policy to increase the number of retail accounts in an effort to diversify and stabilize its sources of funding.
KK’s capital base remains strong, as illustrated by a Tier-1 capital ratio of 14.01% and a total capital adequacy ratio (BIS ratio) of 14.69% in 2012. Despite a slight fall from the 2011 levels (14.70% for the Tier-1 capital ratio and 15.40% for the BIS ratio), the bank’s ratios remained far above the minimum requirements of 4.25% and 8.50% set by the Bank of Thailand (BOT). Furthermore, KK’s capital ratios are likely to be sufficient, in accordance with the BASEL III capital rules. The bank’s equity to assets ratio rose to 14.3% in 2012, from 12.8% in 2011, partly as a result of the acquisition of PHATRA. 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 for doubtful accounts can absorb any downside risks arising from uncertainties in the economic and financial environments.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2013, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.