TRIS Rating 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 securities 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), which owns a 50% stake in KTZ. The rating also takes into consideration the potential benefits KTZ could realize from further utilizing KTB’s nationwide branch network and business relationships to enhance KTZ’s market position. The rating is, however, constrained by KTZ’s tight capital position and high operating expenses, the inherently cyclical nature of the securities industry, and the downward pressure on brokerage commission rates resulting from the full liberalization of brokerage fees in 2012. The market risk associated with KTZ’s proprietary trading activities and its 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 sustain its market share in brokerage services amid intensifying competition, and that it will maintain an adequate risk management system to oversee its margin lending, proprietary trading, and activities related to the issuance of DWs. In addition, TRIS Rating expects that KTZ will not aggressively expand in such a way that significantly increases its financial leverage.
KTZ’s market share in securities brokerage remained sizable at 4.1% in 2012 (ranked 10th among 32 active brokers), despite being slightly lower than in previous years. Its average commission rate was higher than peers, at 19 basis points in 2012. KTZ has been using KTB’s branches to expand its retail client base. Around 40% of KTZ’s new accounts in 2011 and in 2012 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 business referrals and cross-selling of KTZ’s securities-related products more effective. In addition to the business support, KTB also provides KTZ with financial support by granting credit lines for KTZ’s liquidity needs and business expansion efforts. Around 80% of KTZ’s credit facilities are provided by KTB. This support from KTB gives KTZ an advantage over other securities firms not affiliated with a commercial bank.
KTZ is the first among the Thai securities firms to expand in Indochina. It holds a 30% stake in BCEL-KT Securities Co., Ltd. (BCEL-KT), one of the two securities companies in Laos. It also has an investment banking arm in Vietnam through the strategic investment of Seamico Securities PLC (ZMICO) in Thanh Cong Securities Joint Stock Company (TCSC). ZMICO is the company’s other major shareholder, holding a 49.54% stake in KTZ. Its regional network and the first-mover advantage should give KTZ an edge over its local competitors for potential cross-border deals. Investment banking fees contributed 12% of total revenues in 2012, with more than half involving deals outside Thailand. TRIS Rating expects investment banking fees will continue to make a strong contribution to KTZ’s revenue stream in the coming years.
KTZ became profitable after it acquired the securities operations from ZMICO in 2009. However, its profit margin has been relatively thin. The ratio of operating expenses to net revenues remained high at around 77% in 2012, compared with the industry average of 60%. As the intense competition after the liberalization is driving down the industry-wide brokerage commission rate, a thin profit margin might put KTZ at a competitive disadvantage and its future profitability could be under pressure. It remains a challenge for the management team to keep the operating expenses down and better prepare the company for when market conditions turn unfavorable.
KTZ has been active in proprietary trading, which exposes the company to a certain level of market risk. Nonetheless, KTZ has reduced the extent of its speculative trading activities and has become more focused on arbitrage opportunities and on hedging its positions in derivative warrants (DWs). KTZ’s share of industry-wide proprietary trading has continually declined from as high as 15% in 2009 to 3% in 2012. KTZ’s margin loan portfolio at the end of 2012 expanded to Bt3.0 billion, up from around Bt1.8 billion a year earlier. The rise was in line with market growth. KTZ’s share of industry-wide margin lending remained stable at slightly over 7%. However, with its thin capital base, the rise in margin loans has caused KTZ to become one of the most highly-leveraged securities firms. TRIS Rating expects KTZ to be cautious in extending more margin loans and in any other decisions that increase financial leverage.
As of 31 December 2012, KTZ’s shareholders’ equity stood at almost Bt2.1 billion. The company’s net capital ratio (NCR) declined to 24%, from 41% a year earlier. Even though the ratio was still higher than the regulatory requirement of 7%, KTZ’s aggressive utilization of capital has made it a securities firm with one of the lowest NCRs.
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