TRIS Rating has affirmed the company and senior debenture ratings of Kiatnakin Bank PLC (KK) at “A-”. The outlook remains “positive”. The ratings reflect KK’s successful diversification efforts and the recent improvements in its financial performance after it merged with Phatra Capital PLC (PHATRA CAPITAL). The ratings take into account the management team’s expertise in KK’s core businesses: auto hire purchase lending and the capital market segment. The ratings also reflect the bank’s high level of capital funds. However, the ratings are constrained by the bank’s small market share, limited distribution network, and high funding costs. KK’s asset quality and its future growth may be affected by the current slowdown in the Thai economy and the ongoing domestic political uncertainty. Intense competition in the banking and securities industries might limit the profitability of Kiatnakin Phatra Financial Group (KKP Group). The “positive” outlook reflects the expectation that KK will be able to benefit from the merger so as to continue growing, with sustained profitability. The outlook also reflects the bank’s ability to control asset quality, secure stable sources of funds at reasonable prices, and maintain a sufficient level of capital funds to absorb unexpected losses from future downside risks.
KK is a small-sized bank, ranked 11th among 15 Thai commercial banks in terms of consolidated asset size. KK had a 1.9% market share in loans, and a 1.4% share in deposits as of December 2013. After the merger, the KKP Group’s structure was reorganized to comprise two business segments: commercial banking and capital markets. The Group is able to offer its clients a full range of financial products and services. The merger gave KKP Group an enhanced competitive edge in the capital market segment. The Group’s sources of income are now more diversified because the capital market segment generates a large amount of non-interest income. KK’s financial profile could further improve should it achieve the hoped-for benefits from group-wide synergies.
KK is exposed to loan concentration risk. At the end of 2013, the bank’s two largest loan portfolios comprised auto hire purchase lending (73% of total loans) and residential property development project loans (19%). KK’s loan portfolio has continually expanded, with a compound annual growth rate of 21% from 2008 to 2012. However, to improve the quality of its retail loan portfolio, KK slowed down the rate of expansion of its auto hire purchase loans in 2013. Auto loans grew by 10% in 2013, compared with 27% in 2012. The portfolio of residential property development project loans, however, grew rapidly in 2013. Residential property development loans soared by 32%, compared with a 21% rise in 2012. As of December 2013, KK’s total loans and receivables reached Bt192.1 billion, or a 13% rise from the 2012 level. The bank’s risk appetite is high. KK makes high-risk loans, chasing higher returns to offset its high funding costs. In addition, KK has a latent credit risk exposure from the loans it makes for used cars, and the loans it has made to small and medium-sized enterprises (SMEs). The used car loans and SME loans are considered as medium to high credit risk loans.
KK has made an effort to enhance the quality of its assets by improving its risk management platform. However, the bank’s loan quality has deteriorated over the past two years. The amount of non-performing loans (NPLs) climbed from Bt4.7 billion in 2011 to Bt5.6 billion in 2012, a 19% rise, and to Bt7.3 billion in 2013, a 29% rise. The ratio of NPLs to total loans was 3.8% in 2013, up from 3.3% in 2012. To improve the efficiency of its risk management system, in 2013, KK adopted the collective approach when setting loan loss reserves for its hire purchase loan portfolio. The loan loss reserves, as a percentage of the regulatory minimum requirement, rose from 141% in 2012 to 187% in 2013. The NPL coverage ratio, however, fell to 100% in 2013, compared with 110% in 2012. KK faces a challenge as it tries to keep the loan quality from further deterioration, especially with an unfavorable economic outlook and an uncertain political situation.
KK’s financial position has improved. In 2013, the bank reported Bt4.4 billion in consolidated net profits, up by 30% year-on-year (y-o-y). Net income increased thanks to an increase in net interest income and non-interest income, as well as the control of operating costs. Non-interest income rose substantially, mainly from greater security brokerage fees. In 2013, return on average assets (ROAA) was 1.8%, up from 1.6% in 2012. Although KK has been able to sustain the high yields from its core businesses, its funding costs have been the highest in the banking industry. KK’s high funding costs mean its industry rivals have a greater competitive edge.
KK is exposed to some level of liquidity risk. KK has been reliant on deposits and wholesale funding from high net worth customers. Apart from the high funding costs, this funding source is also considered a highly volatile funding source. However, KK has a policy to add more retail accounts in an effort to diversify and stabilize its sources of funding.
KK’s regulatory capital remains strong, as illustrated by a Tier-1 capital ratio of 13.10% and a total capital ratio (BIS ratio) of 13.66% in 2013. These ratios fell in 2013 as KK expanded its loan portfolio. However, the bank’s ratios remained above the minimum requirements of 6.00% and 8.50% set by the Bank of Thailand (BOT).
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