TRIS Rating has upgraded the company and existing senior unsecured debenture ratings of Krung Thai Card PLC (KTC) to “A-” from “BBB+”. At the same time, TRIS Rating has assigned a “A-” rating to KTC’s proposed issue of up to Bt12,000 million in senior unsecured debentures. The outlook remains “stable”. The upgraded ratings reflect the continual improvement in KTC’s financial performance and its asset quality during 2012-2014. The ratings also take into consideration the stronger support from its major shareholder, Krung Thai Bank PLC (KTB). The ratings are, however, constrained by increasingly competitive operating environment which affects the KTC’s profitability.
The “stable” outlook reflects the expectation that KTC will be able to maintain its market positions and asset quality by keeping its efficiency of collections and strict underwriting policy, as well as, maintain current leverage level. TRIS Rating also expects that KTB will continue to provide financial and business supports to KTC.
The credit upsides are the case that KTC continuously delivers better-than-expected financial performance which will be able to strengthen its financial profile, as well as control credit cost amidst a weak economy and challenging competitive pressures in the consumer finance industry.
Although the credit downsides are limited in the next 12-18 months, KTC’s ratings or outlook could be revised downward should there be any factors which would significantly affect KTC’s financial performance and credit profile, i.e., narrower interest spread, higher operating expenses, or deterioration in asset quality.
KTB holds a 49.45% stake in KTC. KTC is considered as a strategic affiliate in KTB’s universal banking platform. According to the Bank of Thailand’s consolidated supervision regulations, KTC is an affiliate of KTB on a non-solo consolidation basis. As a company in the KTB Group, KTC continues to utilize the bank’s nationwide branch network as a channel to expand its client base and as channels for payment and services. KTC also collaborates with KTB in its marketing campaigns. Over 40% of KTC’s new cards issued in 2014 came through referrals from KTB, up from one-fourth over the last few years. KTC receives financial support from KTB in the forms of credit facilities. It has a credit line from KTB worth Bt18,030 million, which remained unutilized as of December 2014. 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, and to 1.7% at the end of 2014. The results are similar for personal loans. The NPL (over 90 days past due) ratio for personal loans declined from 4.7% in the first quarter of 2012 to 1.5% at the end of 2013, and to 1.2% at the end of 2014. Despite the drop in NPLs, the charge-off rate rose from 7.4% in 2012 to 10.3% in 2013 and 9.4% in 2014. The rise was partly due to a tighter provisioning policy. As a result, the ratio of the allowance for doubtful accounts to NPLs rose to 364% at the end of 2014, up from 293% at the end of 2013 and 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 for streamlining its operations and getting costs under control. KTC started aggressive marketing efforts in the last quarter of 2012. As a result, revenues started to grow in 2013 after having remained stagnant since 2008. In 2013, KTC reported a net profit, excluding extraordinary items related to the sale of a long-term investment, of Bt1,037 million, compared with Bt255 million in 2012. KTC reported a record profit of Bt1,755 million in 2014. The return on average assets (ROAA) improved to 3.3% in 2014, from 2.5% in 2013. The ramp-up of provisions for credit card reward points was largely completed in 2011 and 2012, resulting in a much lower burden from 2013 onwards. The major efficiency improvements 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 is regard to the way interest is charged on credit card receivables. This change may affect KTC’s profits. However, the consideration process of new regulations was suspended after the dissolution of parliament in December 2013. Therefore, the risk from the regulatory change on KTC’s profitability has been delayed until the new regulations are raised to be reconsidered.
With its ability to access a diverse funding base, plus the financial support from KTB, short-term liquidity is not a major concern for KTC. Its portfolio is 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 portion of its overall borrowings. While KTC relies on borrowings from financial institutions and the debt market as its main funding sources, its commercial bank-backed competitors have access to relatively cheaper sources of funding: bank deposits. However, the improvement of KTC’s performance plus the downward trend of interest rate during the past three years reduced its funding cost from 5.0% in 2012 to 4.4% in 2014.
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 this leverage measure closer to the covenant limit of 10 times. The improved operating results in 2012-2014 helped raise KTC’s equity base, lowering the debt to equity ratio to 6.4 times at the end of 2014. Given KTC’s modest dividend payout policy and future prospects, TRIS Rating expects KTC’s equity base to be maintained at this level in the next two to three years. However, the planned growth in KTC’s portfolio may cause it to borrow more and raise its leverage ratio.
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