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, rated “A-/Stable” 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 positions 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.
Credit upside is limited in the near term, given the inherent risks of the securities industry and the current credit profile of KK. On the other hand, PHATRA’s rating/outlook could be negatively impacted if the credit profile of KK becomes weakened.
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 some of the best in Thailand. Its brokerage market shares for local institutions and foreign investors in 2014 remained strong at 9.0% and 8.5%, respectively.
Another strength of PHATRA lies in its wealth management services. 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 Bt334 million a year (roughly 18% 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 with KK will enhance PHATRA’s strength in the investment banking business in the long run.
KK became the ultimate parent company of PHATRA in September 2012, when it acquired a 99.9% stake in Phatra Capital PLC, which owned a 99.9% 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.
PHATRA has been expanding its principal investment activities. Even though PHATRA is pursuing supposedly low-risk trading strategies and has no positions that closely track the market direction, its risk profile is 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 profitability has been strong. Its operating expenses are low, relative to its peers. The ratio of operating expenses to net revenues was 47% for PHATRA in 2014, compared with the industry average of 60%.
As of December 2014, shareholders’ equity stood at Bt5.3 billion, ranking PHATRA among the top five brokers in terms of its equity base. Despite the large capital base, PHATRA is one of the most highly leveraged securities firms. The rise in PHATRA’s degree of financial leverage in the last few years was due to the expansion of its proprietary investments portfolio and the hedging activities related to the financial products it issued for clients. PHATRA ended 2014 with a net capital ratio (NCR) of 55%, compared with the regulatory requirement of 7%.
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