TRIS Rating has affirmed the company and current senior debenture ratings of Krungthai Card PLC (KTC) at “BBB+”. At the same time, TRIS Rating has assigned a “BBB+” rating to KTC’s proposed issue of up to Bt12,000 million in senior debentures. The outlook remains “stable”. The ratings reflect KTC’s established position in the credit card industry, the improvement in its asset quality, and the support it receives from its major shareholder, Krungthai Bank PLC (KTB), which holds a 49.45% stake in KTC. The ratings are, however, constrained by KTC’s less competitive cost of funds, the increasingly competitive operating environment, and regulatory risk, which might affect the industry’s growth potential and profitability. The “stable” outlook reflects the expectation that KTC will strive to maintain the efficiency of collections and maintain its strict underwriting criteria as it expands. TRIS Rating also expects that KTB will continue to provide financial and business support to KTC.
KTC was established in 1996, as a wholly-owned subsidiary of KTB, to run the bank’s credit card business on behalf of KTB. In 2002, in order to operate more efficiently as a separate consumer finance company, KTB transferred its credit card portfolio to KTC and listed KTC on the Stock Exchange of Thailand (SET). As a company in the KTB Group, KTC continues to utilize the bank’s nationwide branch network as one channel to expand its client base. Over one-fourth of KTC’s new clients have been obtained through this channel over the last few years. KTC also receives financial support from KTB. It has a credit line from KTB worth Bt18,030 million, which remained unutilized as of December 2013.
With its ability to access a diverse funding base, plus the financial support it receives from KTB, short-term liquidity is not a major concern for KTC. Its portfolio was funded by borrowings from many financial institutions, and by debentures with a range of maturities. No loan from a single financial institution represents a significant proportion of its overall borrowings. While KTC relies on borrowings from financial institutions and the debt market as its main funding sources, its commercial bank competitors have access to a relatively cheap source of funding from deposits. KTC’s high funding cost partly offsets the strength of its franchise and makes it difficult for KTC to compete more aggressively and increase its market share.
After the flood crisis at the end of 2011, KTC decided to bring debt collection back in-house, under its full control. The company has also put more emphasis on pre-delinquent collections. Efficiency has improved significantly, as evidenced by a reduction in non-performing loans (NPLs). Credit card NPLs (over 90 days past due) declined from 5.3% of gross receivables in the first quarter of 2012 to 2.2% at the end of 2013. Similarly for personal loans, the NPL ratio declined from 4.7% in the first quarter of 2012 to 1.5% at the end of 2013. Despite the drop in NPLs, the net charge-off rate rose to 7.3% in 2013, up from 4.9% in 2012. The rise was partly due to a tighter provisioning policy. The ratio of the allowance for doubtful accounts to NPLs rose to 293% at the end of 2013, up from 195% at the end of 2012. KTC increased the allowance for possible loan losses in order to prepare the company for any potential adverse change in the operating environment.
KTC spent most of 2012 streamlining its operations and setting costs under control. KTC started aggressive marketing efforts in the last quarter of 2012. As a result, revenues started to grow in 2013 after remaining stagnant since 2008. KTC reported a record profit in 2013. Excluding extraordinary items related to the sale of a long-term investment, KTC’s net profit in 2013 jumped to Bt1,037 million, compared with Bt255 million in 2012. Administrative expenses in 2013 declined sharply to Bt5,274 million, compared with Bt6,565 million in 2012. The cost saving efforts and an information technology (IT) investment project undertaken in 2012 started to pay off in 2013, with the benefits likely to carry through the coming years. In addition, the ramp up of provisions for credit card reward points were largely completed in 2011 and 2012, resulting in a much lower burden from 2013 onwards. The major efficiency improvement in 2012 and the abundant reserves from its conservative provisioning policy should enable KTC to maintain its profitability over the next few years. One looming regulatory change regarding the way interest is charged on credit card receivables may affect KTC’s profits. Such risk and its estimated effect on profitability have been incorporated in KTC’s current credit ratings.
A huge operating loss in 2011 substantially weakened KTC’s equity base. Its debt to equity ratio rose to 8.8 times at the end of 2011, pushing its leverage closer to the covenant limit of 10 times. The improved operating results in 2012 and 2013 helped raise KTC’s equity base, lowering the debt to equity ratio to 7.5 times at the end of 2013. Given KTC’s modest dividend payout policy and future prospects, TRIS Rating expects KTC’s equity base to return to the pre-2011 level soon. However, the potential growth in KTC’s portfolio may lead to more borrowings and put some pressure on its leverage ratio.
Up to Bt12,000 million senior debentures due within 2020 BBB+ Rating Outlook: Stable
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 2014, 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.