TRIS Rating has assigned a rating of “A-” to the proposed issue of up to Bt1,000 million in senior unsecured debentures of Kiatnakin Bank PLC (KK). At the same time, TRIS Rating has affirmed the company and current senior unsecured debenture ratings of KK at “A-”. The outlook remains “positive”. The ratings reflect KK’s successful diversification efforts after it merged with Phatra Capital PLC to become Kiatnakin Phatra Financial Group (KKP Group). The ratings take into account KK’s strong base of capital funds, plus the management team’s expertise in KK’s core businesses: auto hire-purchase lending and the capital market segment. However, the ratings are constrained by the bank’s small market share, high funding costs, and deteriorating loan quality. In addition, the slowdown of the Thai economy may limit KK’s growth and profitability. The “positive” outlook reflects the expectation that KK will be able to benefit from the merger and continue growing, with sustained profitability. The outlook also reflects the bank’s ability to control asset quality, secure stable sources of funds at reasonable costs, and maintain a sufficient level of capital funds to absorb unexpected losses from future downside risks.
KK is a small bank, ranked 10th among 16 Thai commercial banks in terms of consolidated asset size. KK had a 1.9% market share in loans, and a 1.5% share in deposits as of June 2014. The KKP Group is able to offer its clients a full range of financial products and services. After the recent merger, the KKP Group reorganized into two business segments: commercial banking and capital markets. The merger gave the KKP Group an enhanced competitive edge in the capital market segment. Its sources of income are 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.
As of June 2014, KK’s loans and receivables totaled Bt195.3 billion. KK is exposed to loan concentration risk. The bank’s two largest loan portfolios comprised auto hire-purchase lending (70% of total loans) and residential property development project loans (20%). From 2007 through 2012, KK’s loan portfolio expanded rapidly, growing a compound annual growth rate of 21% over these five years. However, auto sales slumped in 2013 through the first half of 2014. As a result, KK slowed the rate of expansion of its auto hire-purchase loan portfolio. The bank’s total loans rose by 13% year-on-year (y-o-y) in 2013 and rose by 6% y-o-y as of June 2014.
KK’s risk appetite is high. KK makes high-risk loans, chasing higher returns to offset its high funding costs. The bank has a credit risk exposure from its used car loans, loans to small and medium-sized enterprises (SMEs), and the commercial loans it makes in the property development segment. These loans are considered as medium to high credit risk loans.
Over a past few years, KK’s loan quality has deteriorated. The amount of non-performing loans (NPLs) climbed from Bt4.7 billion in 2011 to Bt7.3 billion in 2013, and to Bt10.8 billion at the end of June 2014. The ratio of NPLs to total loans rose to 5.5% in June 2014, from 3.5% in December 2011. In 2013, KK adopted the collective approach when setting loan loss reserves for its hire-purchase loan portfolio. As a consequence, the loan loss reserves, as a percentage of the regulatory minimum requirement, rose from 141% in 2012 to 187% in 2013. However, the level of excess reserves has declined, as the value of NPLs increased. KK’s loan loss reserves fell to 131% of the minimum requirement at the end of June 2014. KK faces a challenge as it tries to keep the loan quality from deteriorating further, especially with an unfavorable outlook for the Thai economy.
In 2013, KK reported Bt4.4 billion in consolidated net profits, up by 30% y-o-y. Net profits increased thanks to increases in net interest income and non-interest income, as well as the control of operating costs. However, in the first half of 2014, the bank’s financial performance dropped substantially. Net income for the first six months of 2014 was Bt1.3 billion, falling by 46% y-o-y. Non-interest income declined by 37% y-o-y, while operating expenses rose by 13% y-o-y. For the first half of 2014, the return on average assets (non-annualized) was 0.51%, compared with 0.98% for the same period last year. In addition, KK has been able to sustain the high yields from its core businesses but 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’s capital ratios have declined as the bank has expanded its loan portfolio. Despite the decreases, the bank’s ratios remained sufficient to permit future growth. As of June 2014, KK reported a Tier 1 capital ratio of 13.29% and a total capital ratio (BIS ratio) of 13.72%, above the minimum requirements of 6.00% and 8.50%, respectively, set by the Bank of Thailand.
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