TRIS Rating has affirmed the company rating of KT Zmico Securities Co., Ltd. (KTZ) at “BBB+” with “stable” outlook. The rating reflects KTZ’s sizable market share in securities brokerage, its presence in the Lao and Vietnamese markets through its affiliated securities companies, and the support it receives from Krung Thai Bank PLC (KTB) and Seamico Securities PLC (ZMICO), which own its stakes of 50% and 49.6%, respectively. The rating also takes into consideration the potential benefits KTZ could realize from further utilizing KTB’s nationwide branch network and business relationships to enhance its own market position. The rating is, however, constrained by KTZ’s tight capital position and high operating expenses, 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 “stable” outlook reflects the expectation that KTZ will continue to receive the full support of KTB, that it will be able to sustain its market share in brokerage services amid intensifying competition, and that it will maintain an adequate risk management system to oversee its margin lending, and the hedging activities related to the issuance of derivative warrants (DWs). In addition, TRIS Rating expects that KTZ will not aggressively expand in such a way that significantly increases its financial leverage.
KTZ’s market share in securities brokerage remained sizable at 3.93% in 2013 (ranked 12th among 33 active brokers), despite being slightly lower than in previous years. Its average commission rate, at 18 basis points in 2013, was higher than the commission rates at many peer companies. KTZ has been using KTB’s branches to expand its retail client base. In 2011, KTZ’s new accounts that were referred from KTB comprised 39% of all new accounts, up from less than 10% in 2010. In 2012 and 2013, new accounts referred from KTB grew to make up 43% and 46% of total new accounts, respectively. KTZ makes a concerted effort to communicate with KTB’s staff so that the KTB staff can make business referrals and cross-sell KTZ’s securities-related products more effectively. In addition to the business support, KTB also provides KTZ with financial support. KTB has granted credit lines to KTZ so that KTZ meets its liquidity needs and has enough capital to expand. Around 80% of KTZ’s credit facilities are provided by KTB. This support from KTB gives KTZ an advantage over other securities firms which are not affiliated with a commercial bank.
KTZ is the first among the Thai securities firms to expand in Indochina. It holds a 30% stake in BCEL-KT Securities Co., Ltd. (BCEL-KT), one of the two securities companies in the Lao People's Democratic Republic (Lao PDR). It also has an investment banking arm in Vietnam, joining ZMICO to invest in Thanh Cong Securities Joint Stock Company (TCSC). ZMICO is KTZ’s other major shareholder, holding a 49.6% stake in KTZ. KTZ’s regional network plus its first-mover advantage, should give KTZ an edge over its local competitors for potential cross-border deals. Investment banking fees contributed only 2% of total revenues in 2013, down from 12% in 2012. However, TRIS Rating expects investment banking fees, especially deals outside Thailand, will make a strong contribution to KTZ’s revenue stream in the coming years once again.
KTZ became profitable after it acquired ZMICO’s securities operations in 2009. However, its profit margin has been relatively thin due to its high operating costs. The ratio of operating expenses to net revenues was around 72% in 2013, higher than the industry average of 60%. Intense competition, after the recent industry liberalization is driving down the brokerage commission rate across the industry. A thin profit margin might put KTZ at a competitive disadvantage, its future profitability could be under pressure. The management team faces twin challenges: keeping the operating expenses down, and diversifying into non-brokerage fee businesses. A greater degree of diversification will mitigate the downside risk from unfavorable stock market conditions that every brokerage firm faces. The proportion of brokerage fees to total revenues averaged almost 75% during 2009 to 2013.
In the past, KTZ had been active in proprietary trading, which exposed the company to a certain level of market risk. At present, KTZ has not increased its speculative trading activities. KTZ has become more focused on arbitrage opportunities and on hedging its positions in DWs. KTZ’s share of industry-wide proprietary trading has continually declined, from a sliding high of 15% in 2009 to 0.4% in 2013. KTZ’s margin loan portfolio during 2013 expanded to Bt4.4 billion, up from around Bt3 billion a year earlier. The rise reflected industry growth in margin loans. KTZ’s share of industry-wide margin lending remained stable at around 6%-7%. However, with its thin capital base, the rise in margin loans has caused KTZ to become one of the most highly-leveraged securities firms. TRIS Rating expects KTZ to be cautious when extending more margin loans and when making any other decision that increases financial leverage.
At the end of 2013, KTZ’s shareholders’ equity increased to Bt2.4 billion from Bt2.1 billion at the end of December 2012. This rise was due to a successful rights offering during the year. The success of the rights offering shows that KTZ has the support of its major shareholders. The company’s net capital ratio (NCR) increased to 35%, from 24% a year earlier. However, KTZ’s aggressive leveraging of its equity capital base has made it a securities firm with one of the lowest NCRs in the industry. TRIS Rating will continue to monitor KTZ’s leverage on equity capital base.
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