TRIS Rating has assigned the company rating of Phatra Securities PLC (PHATRA) at “A-” with “stable” outlook. The rating reflects PHATRA’s well-established brokerage franchise among institutional investors and high net worth clients, its leading market position in investment banking, and its strong brand equity. The rating also takes into consideration the potential synergy and the funding support from its ultimate parent company, Kiatnakin Bank PLC (KK, “A-/Positive” rated by TRIS Rating). The rating is, however, constrained by 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 the company’s principal investment activities also affects the risk profile of the company. The “stable” outlook reflects the expectation that PHATRA will be able to maintain the leading position in its investment banking and brokerage businesses amid strong competition. In addition, TRIS Rating expects PHATRA to be able to control the embedded risks arising from its principal investment activities and financial products. TRIS Rating also expects PHATRA to gradually build up its equity base as its portfolio expands without relying too much on debt financing.
PHATRA has a well-established institutional brokerage client base and business platform. Its strategic alliance with Bank of America Merrill Lynch (ML) has allowed PHATRA to access ML’s global network, expertise, and resources. PHATRA’s research has been recognized as one of the best in Thailand. Its brokerage market shares for local and foreign institutional investors in 2012 were strong at 10.3% and 7.5%, respectively. Another strength of PHATRA lies in its wealth management service. PHATRA provides asset allocation advisory services to high net worth clients, offering a wide range of financial products across multiple asset classes from its open-architecture platform. By providing value-added services, PHATRA avoids price-based competition with other brokers. In addition, PHATRA also earns, as a selling agent, recurring fees for the amounts of its clients’ wealth invested in mutual funds run by other asset management companies. In the second half of 2012, PHATRA started offering private fund management services to its clients. At the end of March 2013, the amount of assets under management has grown rapidly to Bt4.7 billion. Some of these private fund clients were referred to PHATRA by KK. This is one area where PHATRA could potentially leverage the bank’s client base of high net worth clients further.
PHATRA has a lengthy investment banking track record in Thailand. Given its longstanding relationships with many large corporations and its strong distribution channels covering both the local and international markets, PHATRA should be able to secure its leading market position in this business. Revenue from investment banking has been strong, averaging Bt270 million a year over the past five years. After merging with KK, PHATRA will be able to offer its clients a broader scope of financial solutions to serve their funding needs. The synergy will enhance PHATRA’s strength in the investment banking business in the long run.
KK became the ultimate parent company of PHATRA in September 2012, when it acquired a 99.928% stake in Phatra Capital PLC, which owned a 99.75% stake in PHATRA. As a subsidiary of KK, PHATRA has been granted a Bt6,350 million credit facility, to be shared with the affiliated companies in KK’s Capital Market Group. This new source of funds has enhanced PHATRA’s financial flexibility. However, with this facility in hand, PHATRA plans to expand aggressively its principal investment activities. Even though PHATRA is pursuing supposedly low-risk trading strategies and has no positions that closely track market directions, its risk profile will be affected by the expansion of this inherently risky activity. TRIS Rating expects PHATRA to maintain an adequate risk management system to cover its principal investment activities.
PHATRA’s profitability has been strong, and in line with peers. Its net profit jumped 18% to Bt571 million in 2012. Except in 2010, the ratio of operating expenses to net revenues has been in the range of 50%-55% for the past five years, with the staff costs representing roughly 40% of net revenues.
As of 31 March 2013, shareholders’ equity stood at almost Bt3.9 billion, ranking PHATRA among the top 10 brokers in terms of its equity base. Despite the large capital base, PHATRA is one of the most highly leveraged securities firms. PHATRA’s ratio of total assets to equity jumped to 4.0 times at the end of March 2013, up from 2.8 times at the end of 2012. The degree of financial leverage is expected to rise even further as its proprietary investments portfolio continues to expand. PHATRA ended 2012 with a net capital ratio (NCR) of 54%, compared with the regulatory requirement of 7%.
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