TRIS Rating has affirmed the company rating of Phatra Securities PLC (PHATRA) at “A-” with “stable” outlook. The rating reflects PHATRA’s well-established brokerage franchise among institutional investors and high net worth clients, its leading market position in investment banking, and its strong brand equity. The rating also takes into consideration the potential synergy and the funding support PHATRA receives from its ultimate parent company, Kiatnakin Bank PLC (KK, “A-/Positive” rated by TRIS Rating). The rating is, however, constrained by 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 market risk associated with the company’s principal investment activities also affects the risk profile of the company. The “stable” outlook reflects the expectation that PHATRA will be able to maintain its leading position in the investment banking and brokerage businesses amid strong competition. In addition, TRIS Rating expects PHATRA to be able to control the embedded risks arising from its principal investment activities and issuances of new financial products.
PHATRA has a well-established institutional brokerage client base and business platform. Its strategic alliance with Bank of America Merrill Lynch (ML) has allowed PHATRA to access ML’s global network, expertise, and resources. PHATRA’s research has been recognized as one of the best in Thailand. Its brokerage market shares for local and foreign institutional investors in 2013 remained strong at 9.7% and 8.6%, respectively.
Another strength of PHATRA lies in its wealth management service. PHATRA provides asset allocation advisory services to high net worth clients, offering a wide range of financial products across multiple asset classes from its open-architecture platform. By providing value-added services, PHATRA avoids competing directly with other brokers based on commission rates alone.
PHATRA has a lengthy investment banking track record in Thailand. It has longstanding relationships with many large corporations and has strong distribution channels covering both the local and international markets. Revenues from investment banking over the past five years have averaged Bt335 million a year (roughly 20% market share). After merging with KK, PHATRA will be able to offer its clients a broader scope of financial solutions to serve their funding needs. The synergy will enhance PHATRA’s strength in the investment banking business in the long run.
KK became the ultimate parent company of PHATRA in 2012, when it acquired a 99.9% stake in Phatra Capital PLC, which owned a 99.8% stake in PHATRA. As a subsidiary of KK, PHATRA has been granted a Bt6,350 million credit facility, to be shared with the affiliated companies in KK’s Capital Market Group. This new source of funds has enhanced PHATRA’s financial flexibility. However, with this facility in hand, PHATRA plans to expand aggressively its principal investment activities. Even though PHATRA is pursuing supposedly low-risk trading strategies and has no positions that closely track the market directions, its risk profile will be affected by the expansion of this inherently risky activity. TRIS Rating expects PHATRA to maintain an adequate risk management system to cover its principal investment activities.
PHATRA’s net profit in 2013 jumped to Bt1,309 million, up 129% from the Bt571 million it earned in 2012. The increase was due mainly to high market trading volume and a rise in investment banking revenues. PHATRA’s profitability has been strong. Its operating expenses are low relative to peers. The ratio of operating expenses to net revenues was 39% for PHATRA in 2013, compared with industry average of over 50%.
As of December 2013, shareholders’ equity stood at Bt5 billion, ranking PHATRA among the top 10 brokers in terms of its equity base. Despite the large capital base, PHATRA is one of the most highly leveraged securities firms. PHATRA’s ratio of total assets to equity continued to grow to 3.7 times at the end of 2013, up from 2.8 times in 2012, and 1.9 times in 2011. The rise in PHATRA’s degree of financial leverage was due to the expansion of its proprietary investments portfolio and the hedging activities related to financial products it issued for clients. PHATRA ended 2013 with a net capital ratio (NCR) of 37%, compared with the regulatory requirement of 7%.
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Phatra Securities PLC (PHATRA)
Company Rating: A-
Rating Outlook: Stable
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