TRIS Rating has affirmed the company rating of DBS Vickers Securities (Thailand) Co., Ltd. (DBSVT), a wholly-owned subsidiary of DBS Vickers Securities Holdings Pte., Ltd. (DBSVSH), affiliated company within DBS Group in Singapore, at “A-” with “stable” outlook. The rating is enhanced from DBSVT’s stand-alone credit profile to reflect its status as a strategically important subsidiary of the DBS Group, which provides DBSVT with both financial and non-financial supports. The stand-alone rating is based on DBSVT’s ability to utilize the network and resources of the DBS Group and the fact that it receives business from the clients of the DBS Group. The strengths are, however, constrained by DBSVT’s high operating expenses and its tight capital position. In addition, the stand-alone rating is constrained by the 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 “stable” outlook reflects the expectation that DBSVT will remain a strategically important affiliate of the DBS Group, playing an ongoing role in Thailand’s securities market as part of the DBS Group’s international network. In addition, the outlook assumes DBSVT will continue to receive business and financial support from its parent company. TRIS Rating also expects DBSVT to sustain its market position and financial profile in the medium term, amid intensifying competition and falling brokerage commission fees.
The rating and/or outlook for DBSVT could be negatively impacted if the company continues to lose its market position in the securities brokerage which would cause its performance to deteriorate more than expected. In contrast, an upward revision could materialize if DBSVT improves its market position and financial profile.
DBSVT is a wholly-owned subsidiary of DBSVSH. From the perspective of the DBS Group, DBSVT is a strategically important entity in Thailand that provides research, brokerage, and other services to serve clients in the DBS Group’s network of affiliated companies. DBSVT’s scope of business and risk management framework are closely controlled by its parent company to ensure DBSVT complies with the Group’s objectives.
DBSVT has derived over 50% of its annual securities brokerage trading volumes from the DBS Group over the past few years. DBSVT’s market share in the foreign investor segment has remained strong. However, trading in the foreign investor segments most commonly goes through the Direct Market Access (DMA) system, at a lower commission rate than the traditional order. In the retail investor segment, intense competition from local brokers has caused DBSVT’s market share to decline significantly over the last few years. Overall, DBSVT’s securities brokerage market share, in terms of industry-wide trading value, fell from 2.8% in 2013 to 2.3% in 2014, and sustained at 2.3% in the first five months of 2015.
DBSVT’s revenues from securities and derivatives brokerage accounted for 76% of its total revenues in 2014, compared with the industry average of 68%. Fee and service income has been growing but remains small, contributing less than 5% of DBSVT’s total revenues in 2014. DBSVT has been trying to grow its wealth management service segment, by generating more fees from managing private funds and from acting as a selling agent. DBSVT’s profitability would improve if it could reduce its reliance on revenue from brokerage fees. Competition in brokerage services is intense and commission rates are getting thinner.
DBSVT’s exposure to market risk is minimal. It does not engage in speculative proprietary trading. The company has a policy to hedge its positions arising from issuing structured products. As for its credit risk exposure, DBSVT’s margin loan portfolio stood at Bt1.7 billion at the end of December 2014, representing 159% of its own equity and 3% of industry-wide margin lending. TRIS Rating expects DBSVT to be able to control the credit risk of its margin loan portfolio by strictly enforcing margin calls and forced sales, and by maintaining its stringent criteria on collateral and underwriting.
DBSVT reported an operating loss of Bt3 million in 2014, compared with a net profit of Bt108 million in 2013. Its high operating expenses have put pressure on the company’s profitability. Moreover, its cost structure is relatively rigid, causing its profits to fall sharply when revenues decline. DBSVT’s operating expenses ranged from 73%-78% of net revenues from 2011 through 2013. The figure rose to 93% of net revenues in 2014, when net revenues fell by 20%. In contrast, the industry averages ratio of operating expenses to net revenues ranged from 54%-61% annually for 2011-2014.
DBSVT has a large amount of available credit lines from several local financial institutions which should be enough available credit to fund its operations and cover any liquidity shortfalls. The company also has a credit line from its parent company which further enhances DBSVT’s financial flexibility. As of December 2014, DBSVT’s shareholders’ equity was Bt1.07 billion. Its degree of financial leverage, as measured by the ratio of adjusted asset to equity, declined slightly in 2014, but remained high relative to peers. DBSVT’s net capital ratio (NCR) stood at 64% at the end of 2014, compared with the regulatory requirement of 7%.
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