TRIS Rating has affirmed the company rating of Bualuang Securities PLC (BLS) at “AA-” with “stable” outlook. The rating is enhanced from BLS’s stand-alone credit profile, reflecting its status as a strategically important member of Bangkok Bank PLC (BBL) Group. The stand-alone rating is based on BLS’s solid franchise in brokerage services and investment banking, its conservative style of management, and the financial flexibility it has as a subsidiary of BBL. The rating also takes into consideration the potential benefits BLS may be able to realize by further leveraging the BBL Group’s nationwide network and business relationships. 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 “stable” outlook reflects the expectation that BLS will be able to utilize its franchise strength and support from the BBL Group to maintain its business and financial stability, despite more intense competition and pricing pressure after the full liberalization of brokerage fees. The outlook also takes into consideration BLS’s conservative policies on margin lending and proprietary trading, as well as its continuing efforts to diversify its sources of revenues and expand its retail customer base.
BLS has a strong market position in securities brokerage, with 4%-5% market shares in terms of trading value over the last few years. Its average commission rate has stayed above the industry average. Its share of industry-wide securities brokerage fees has grown steadily, from 3.5% in 2007 to 5.4% in the first half of 2013. BLS also has a leading market position in investment banking. Revenues from investment banking, which include underwriting fees and financial advisory fees, averaged over Bt300 million per year for the last three years. BLS’s revenues from investment banking are among the highest in the industry.
BLS has limited exposure to market risk, since it has a policy to engage in proprietary trading only for arbitrage purposes and only to hedge its positions in its derivative warrant (DW) business. BLS launched its first DW products in 2010 and is currently the market leader in this segment. BLS employs a dynamic delta hedging strategy to mitigate the price risk of the underlying assets for the DWs. TRIS Rating expects BLS to be able to maintain an effective hedging and risk management system, which will prevent BLS from experiencing major losses from the DW products it offers. As for credit risk exposure, BLS’s margin loan portfolio stood at Bt975 million at the end of June 2013, representing 30% of its own equity and 2.1% of industry-wide margin lending. TRIS Rating expects BLS to maintain its conservative lending standards, despite its plan to expand the margin loan portfolio.
BLS can secure several benefits from being a subsidiary of BBL. BLS has been using BBL’s branches as one of the main channels to expand its retail client base. Around one-third of BLS’s new brokerage accounts in the first half of 2013 came through referrals from BBL. BBL has long-standing relationships with many large business groups. Because of these relationships, BLS has an edge in servicing institutional brokerage clients through privileged corporate access, and an edge in securing investment banking transactions. These types of support give BLS an advantage over other securities firms which are not affiliated with a commercial bank. Moreover, BLS has received financial support from BBL in the form of credit facilities. BLS has been granted a large credit line from BBL. The total amount of available credit should be enough to fund BLS’s operations and cover any liquidity shortfalls.
As part of the Group’s strategy to strengthen its universal banking platform, BBL raised its shareholding in BLS from 56.34% to 99.75% in 2012. BBL aims to fully utilize BLS’s expertise in the capital market to provide the Group’s clients with end-to-end financial services for all their funding and investment needs. In addition, with the larger stake in BLS, BBL can more efficiently manage the capital employed within the Group and provide BLS with a larger amount of funding when needed.
BLS’s profitability has been strong relative to peers. Operating expenses remained under control, at 54% of net revenues in 2011 and 49% in 2012. These levels compare favorably with the industry average of about 60%. As of June 2013, shareholders’ equity of BLS stood at Bt3.2 billion. BLS paid no dividend to its shareholders based on its performance in 2011 and 2012. BLS is also planning to raise Bt1.6 billion in new equity capital from its existing shareholders in the last quarter of 2013. BLS intends to use the new capital to expand its underwriting capacity, its margin loan portfolio, and its DW business. BLS ended 2012 with a net capital ratio (NCR) of 52%, which was higher than the regulatory requirement of 7%.
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