TRIS Rating has affirmed the company rating of Capital Nomura Securities PLC (CNS) at “BBB+” with “stable” outlook. The rating reflects CNS’s experienced and conservative management team, its large capital base, and the brand equity as well as the support CNS receives as a result of being a part of the Nomura Group. The rating also takes into consideration CNS’s strategic move of setting up new branches outside Bangkok by allying with the Small and Medium Enterprise Development Bank of Thailand (SME Bank). The rating is, however, constrained by the cyclical and volatile nature of the securities industry, and the downward pressure on brokerage commission rates resulting from the full liberalization of brokerage fees in 2012. The risks associated with CNS’s relatively large margin loan portfolio also affect the credit profile of the company. The “stable” outlook reflects the expectation that CNS will maintain its conservative style of management and continue to receive support from the Nomura Group. In addition, TRIS Rating expects CNS to be able to strengthen its market position as it expands and to maintain an adequate risk management system to control the credit risk in margin lending.
Established in 1970, CNS is 38% owned by the Nomura Group, which is Japan’s largest securities group. Besides the privilege of using the “Nomura” brand, being a part of the group provides CNS with a steady flow of brokerage trading volume from Nomura’s global network. In the last few years, these foreign investors have comprised almost 10% of CNS’s brokerage client mix in terms of trading values. Affiliated companies within the group collaborate to produce research, which helps add value to CNS’s research products. Moreover, CNS has entered into agreements with several affiliated companies within the Nomura Group to provide various kinds of financial services. The revenues derived from these agreements make up a significant portion of CNS’s fees and services income.
Until recently, CNS operated only a few branches, located only in Bangkok. In 2011, CNS started to expand to provincial areas for the first time, in collaboration with SME Bank. The main purposes of the expansion are to tap the wealth of investors outside Bangkok for CNS’s unit trust selling agent business and to expand its retail client base in the brokerage business. CNS also aims to capture opportunities to provide investment banking services to SME Bank’s clients. It may take a few years to realize the benefits of this strategic move, but the downside risk is limited. The investment needed for the expansion, as well as the operating expenses for the new branches, is relatively small.
CNS has an excellent track record of controlling the credit risk of margin lending. CNS has incurred almost no losses from margin lending over the last 10 years. However, the recent and rapid expansion of the margin loan portfolio may raise some risk management challenges. CNS’s margin loan portfolio rose from Bt3.0 billion at the end of 2011, to a peak of over Bt6 billion in the beginning of 2013, before ending the first half of 2013 at Bt4.9 billion. As of June 2013, CNS’s margin loans represented over 10% of industry-wide margin lending. In contrast, CNS’s market share in securities brokerage is less than 3%. The growing margin loan portfolio exposes the company to higher credit risk. TRIS Rating expects that CNS will continue to be able to control the credit risk of the margin loans by strictly enforcing margin calls and forced sales, and by maintaining its stringent criteria on collateral and underwriting.
CNS has limited exposure to market risk in the equity market as it does not engage in speculative proprietary trading. However, it has recently started a new business unit: fixed income sales and trading. This new line of business may expose the company to some price risk from the debt instruments it trades.
CNS raised Bt1,434 million in new capital from its existing shareholders in June 2013. As a result, shareholders equity jumped from Bt3.7 billion at the end of 2012 to Bt5.3 billion at the end of June 2013. At this level, CNS’s equity base is one of the largest in the industry. CNS intends to use the new capital to enhance and promote the continuous growth of the company’s businesses, such as branch expansion, trading and investment in debt instruments, IT, and working capital. CNS has a large amount of available credit, through credit facilities from several financial institutions. The amount of available credit should be enough to fund the company’s operations and cover any liquidity shortfalls. It also has a US$50 million credit facility from one of its affiliated companies. This line of credit has been fully utilized to fund the expansion of the margin loan portfolio, starting in January 2013.
The full liberalization of brokerage fees in 2012 has resulted in declining brokerage commission rate industry-wide. CNS’s average commission rate has also declined but remained slightly above the industry average. CNS has been able to keep its operating expenses at a competitive level and its profitability has been in line with peers of similar size. Favorable market conditions in the first half of 2013 resulted in a big jump in CNS’s net profit. CNS reported a net profit of Bt277 million for the first half of 2013, compared with Bt73 million in the same period last year. The net capital ratio (NCR) has been historically strong for CNS. It stood at 61% as of 31 December 2012, much higher than the regulatory requirement of 7%.
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.