TRIS Rating has affirmed the company rating and the ratings for the senior unsecured debentures of Kiatnakin Bank PLC (KK) at “A-”. TRIS Rating has also revised KK’s outlook to “stable” from “positive”. The revision reflects several recent developments: a weaker business profile and its financial profile caused by the ongoing deterioration in KK’s loan quality, a decline in profitability, as well as limited prospects for auto sales and hire-purchase lending in Thailand.
The ratings reflect KK’s expertise in its core business segments: auto hire-purchase lending and capital markets. The ratings take into account the broadening of KK’s revenue sources and its high level of capital funds. However, the ratings are constrained by KK’s small market share, relatively high funding costs, and deteriorating loan quality. The recent slowdown of the Thai economy and sluggish domestic auto sales remain the major factors which may limit KK’s growth and profitability.
The outlook revision to “stable” from “positive” reflects the recent weakening in KK’s business profile and financial profile caused by the ongoing deterioration in its loan quality, a decline in profitability, as well as limited prospects for auto sales and hire-purchase lending in Thailand. The outlook reflects the expectation that KK will sustain its level of profitability and its base of capital funds over the next few years.
The credit profile of KK could be negatively impacted if the bank’s profitability continues to decline as its loan portfolio shrinks, or if its credit cost climbs as the quality of its loan portfolio deteriorates. In contrast, the credit upside for KK hinges on KK achieving the hoped-for benefits from group-wide synergies, as illustrated by a higher market share and improvements in its financial position. However, the credit upside is unlikely in the near term, especially when the Thai economy remains weak.
KK was ranked 11th among 17 Thai commercial banks, in terms of consolidated asset size, as of December 2014, with a 1.8% market share in loans, and a 1.2% share in deposits. As a part of its growth strategy, KK successfully merged with Phatra Capital PLC (PHATRA CAPITAL) in 2012 and later created a new brand name for the Group: “Kiatnakin Phatra Financial Group” (KKP Group). The merger gave KKP Group an enhanced competitive edge in the capital market segment. KK's sources of income are now more diversified. Larger proportions of its income are now derived from securities brokerage fees, investment banking fees, and trading gains. However, KK’s capital market segment generates a much larger share of its profits relative to other commercial banks. As a result, KK's financial performance may be more sensitive to the volatility in the capital markets than the financial performances of its peers.
KK faces loan concentration risk because of its strategic focus on a niche market. As of December 2014, the bank’s two largest loan portfolios were auto hire-purchase lending (70% of total loans) and real estate development project loans (19%). In addition, KK makes high-risk loans, chasing higher returns to offset its high funding costs. The bank has credit risk exposure from its used car loans (accounting for 45% of auto hire-purchase 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. KK’s loan quality may suffer if the economy worsens.
From 2008 through 2013, KK’s loan portfolio expanded rapidly, growing a compound annual growth rate of 19% over these five years. However, auto sales slumped substantially in 2014, as a result of the recent slowdown in the Thai economy. A second reason for the tumble in auto sales in 2014 is because auto sales were abnormally high during 2012 and 2013 as a direct result of an economic stimulus package implemented by the previous government. Because of the slide in auto sales in 2014, KK’s auto loan portfolio shrank by 8% compared with the previous year. As of December 2014, KK’s loans and receivables totaled Bt185.9 billion, a 3% decrease from December 2013.
The quality of KK’s loan portfolio, in particular its auto hire-purchase loans and property development project loans, has deteriorated over the past few years. KK’s non-performing loans (NPLs) climbed from Bt4.7 billion in 2011 to Bt10.4 billion in 2014. The ratio of NPLs to total loans rose to 5.6% in 2014, from 3.5% in 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 158% of the minimum requirement at the end of 2014.
In 2014, KK’s profitability declined, largely as a result of a decline in fee-based income and an increase in its credit cost. Return on average assets (ROAA) fell from 1.84% in 2013 to 1.08% in 2014. KK delivered net profits of Bt2.7 billion in 2014, falling by 40% year-on-year (y-o-y). Non-interest income decreased by 18% y-o-y, while provision expenses and operating expenses rose by 43% y-o-y and 12% y-o-y, respectively. In terms of funding, KK is striving to reduce its cost of funds by expanding its reach to include retail depositors. However, KK’s funding costs remain the highest in the banking industry.
KK has a strong base of capital funds, sufficient to fund its growth plans and sufficient to absorb unexpected losses from future downside risks. As of December 2014, KK reported a Tier 1 capital ratio of 14.77% and a total capital ratio (BIS ratio) of 15.16%, above the minimum requirements of 6.00% and 8.50%, respectively, set by the Bank of Thailand (BOT).
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