TRIS Rating has affirmed the company and current senior debenture ratings of Krungthai Card PLC (KTC) at “BBB+”. At the same time, TRIS Rating has assigned a “BBB+” rating to KTC’s proposed issue of up to Bt12,000 million in senior debentures. The outlook remains “stable”. The ratings reflect KTC’s well-established position in the credit card industry, the improvement in its asset quality, and the support it receives from its major shareholder, Krung Thai Bank PLC (KTB), which holds a 49.45% stake in KTC. The ratings are, however, constrained by KTC’s less competitive cost of funds, the increasingly competitive operating environment, and regulatory risk, which might affect the industry’s growth potential and profitability. The “stable” outlook reflects the expectation that KTC will strive to maintain the efficiency of collections and maintain its strict underwriting criteria as it expands. TRIS Rating also expects that KTB will continue to provide financial and business support to KTC.
KTC was established in 1996, as a wholly-owned subsidiary of KTB, to run the bank’s credit card business on behalf of KTB. In 2002, in order to operate more efficiently as a separate consumer finance company, KTB transferred its credit card portfolio to KTC and listed KTC on the Stock Exchange of Thailand (SET). As a company in the KTB Group, KTC continues to utilize the bank’s nationwide branch network as one channel to expand its client base. Over one-fourth of KTC’s new clients have been obtained through this channel over the last few years. KTC also receives financial support from KTB. It has a credit line from KTB worth Bt18,030 million, which remained unutilized as of December 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. No loan from a single financial institution represents a significant proportion of its overall borrowings. While KTC relies on borrowings from financial institutions and the debt market as its main funding sources, its commercial bank competitors have access to relatively cheap sources of funding from deposit. Its 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 market share in credit cards has declined slightly over the last few years. In terms of spending by its cardholders, despite KTC’s 8% compound annual growth rate, its share of industry-wide credit card spending dropped from 12.7% in 2008 to 10.3% in 2012. Gross credit card receivables declined from Bt35,970 million at the end of 2008 to Bt34,007 million at the end of 2012, as a result of the continued shift in client mix towards more transactors (convenience users). KTC’s total revenues (excluding bad debt recovered) have stagnated for the last four years. The company started in the last quarter of 2012 to launch some aggressive marketing campaigns, with plans to continue doing so throughout 2013. The management team faces a challenge to expand its market share and get its top line growing again.
In the beginning of 2012, KTC decided to bring the debt collection service back in-house under its full control. The company has also put more emphasis on pre-delinquent collections. The efficiency has improved significantly, as evidenced by the reduction in NPLs. Credit card NPLs (over 90 days past due) fell from 5.3% of gross receivables at the end of the first quarter of 2012 to 2.7% at the end of the year. Similarly for personal loans, NPL ratio declined from 4.7% in the first quarter of 2012 to 2.5% at the end of the year. The net charge-off rate for the combined portfolio dropped to 4.9% of average gross receivables in 2012, compared to 10.0% in 2011. KTC’s ability to control its asset quality is one crucial factor determining its future profitability.
KTC’s financial profile has substantially weakened after a huge operating loss in 2011 of Bt1,621 million. The loss caused a sharp drop in its equity base, which affected the company’s borrowing capacity. Shareholders’ equity fell by 26% to Bt4,862 million at the end of 2011, compared with a year earlier. KTC’s debt to equity ratio rose to 8.8 times at the end of 2011, pushing its leverage closer to the covenant limit of 10 times. The net profit of Bt255 million posted in 2012 helped raise its equity base at the end of 2012 to Bt5,191 million, bringing its debt to equity ratio down to 8.5 times. KTC’s profitability is expected to continue to improve further in 2013. Given KTC’s modest dividend payout policy and future prospect, its equity base should rise back to the pre-2011 level in a few years.
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