TRIS Rating has affirmed the company rating of KGI Securities (Thailand) PLC (KGI) at “BBB+”. The outlook remains “stable”. The rating reflects KGI’s strong capital position, the strength and diversity of its business operations and revenue base, and its ability to leverage the extensive experience and know-how of its major shareholder, KGI Group in Taiwan (KGI Taiwan). 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 KGI’s proprietary trading activities also affects the risk profile of the company. The “stable” outlook for KGI is based on the expectation that the company will maintain its market position in the brokerage business, and continue to earn a stable stream of income from its asset management subsidiary, ONEAM, despite the volatile conditions in the Thai stock market. In addition, KGI is expected to maintain an adequate risk management system to oversee its margin lending, proprietary trading, and other financial products.
KGI’s sources of revenue are well-diversified and not concentrated in brokerage fees. Over the last four years, the fees earned from KGI’s securities and derivatives brokerage businesses accounted for no more than 50% of its total revenues, compared with industry average of over 70%. By diversifying away from securities brokerage fees, KGI puts itself in a better position to handle the intensifying competition after the full liberalization of brokerage fees. KGI’s gains on trading in securities and derivatives, which represented 23%-41% of total revenues over the last four years, were derived from a variety of business activities, including bond dealing, private repos, derivative warrants, over-the-counter (OTC) derivatives, and investments in debt and equity securities under the company’s account. KGI also has a recurring source of revenue from fund management, through its 99% ownership of ONE Asset Management Co., Ltd. (ONEAM). Revenues from fund management are considered to be less volatile compared with other sources of revenue in the securities business.
KGI is considered one of the industry leaders in terms of product innovation. It has the advantage of being able to utilize KGI Taiwan’s financial engineering know-how and experience in the more-developed Taiwanese financial market to secure its competitive edge in product development in Thailand. By offering a wide range of products, KGI can attract different groups of investors to become its clients. KGI strives to stay ahead of its competitors by launching innovative financial products. KGI can then enjoy higher profit margins on the new products before competition crowds the market.
In terms of securities brokerage trading volume, KGI’s market share for the first five months of 2013 was 3.6% (ranked 12th in the industry), close to its 2012 level but still lower than its share of 4.5% (9th) in 2011. Its brokerage client base is concentrated in large accounts. Over the last few years, securities brokerage trading volume from KGI’s 20 largest clients made up over 40% of its total trading volume, excluding proprietary trading. KGI’s relatively heavy reliance on large accounts, which have higher bargaining power, may make KGI’s market share more vulnerable to competition.
KGI’s proprietary trading exposes the company to market risk. Its investment portfolio includes both fixed income and equity securities, and is one of the largest in the industry. KGI’s exposure to credit risk from margin lending is comparable to peers. Its margin loan portfolio as of March 2013 jumped to Bt1.7 billion, compared with less than Bt1.1 billion at the end of 2011 and 2012. At this level, KGI’s margin loan portfolio comprised 3% of total industry-wide margin lending and around 33% of the value of KGI’s equity.
KGI’s net profit in 2012 declined to Bt443 million, compared with Bt594 million in 2011 and Bt753 million in 2010. The declines in net profit over the past two years were mainly attributable to declines in gains on trading. As the market for financial products such as derivative warrants (DWs) has become more developed and mature, KGI lost the high margins it used to enjoy when it dominated the market. Gains on securities and derivatives trading declined from Bt948 million in 2010 to Bt798 million in 2011 and to Bt467 million in 2012. The ratio of operating expenses to net revenues rose steadily to 57% in 2012, compared with 51% in 2011 and 48% in 2010. Despite the rise, the ratio remains below the industry average.
At the end of 2012, the level of financial leverage, as measured by the ratio of total assets to equity, rose to 2.6 times, compared with 1.5 times at the end of 2011 and 2.2 times at the end of 2010. KGI temporarily reduced the size of its investment portfolio to reduce its risk exposure during the market downturn in the second half of 2011. Its investment position resumed growing in 2012. The net capital ratio (NCR) has been historically strong for KGI. It stood at 74% at the end of 2012, which was well above the regulatory requirement of 7%.
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