TRIS Rating has affirmed the company rating of KGI Securities (Thailand) PLC (KGI) at “BBB+” with “stable” outlook. The rating reflects KGI’s strong capital position, the strength and diversity of its business operations and revenue base, and its ability to leverage the extensive experience and know-how of its major shareholder, KGI Group in Taiwan (KGI Taiwan). 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 KGI’s proprietary trading activities also affects the risk profile of the company.
The “stable” outlook for KGI is based on the expectation that the company will maintain its market position in the brokerage segment and continue to earn a stable stream of income from its asset management subsidiary, ONEAM, despite the volatile conditions in the Thai stock market. In addition, KGI is expected to maintain an adequate risk management system to oversee its margin lending, proprietary trading, and other financial products.
The rating and/or outlook for KGI could be revised upward if the company can demonstrate sustainable improvements in its market position. In contrast, the downward pressure on the rating could develop if KGI’s profitability becomes weakened over time.
KGI’s sources of revenue are well-diversified. The company does not have an excessive reliance on brokerage fees. Over the past five years, the fees earned from KGI’s securities brokerage and derivatives brokerage segments accounted for less than 50% of its total revenues, compared with an industry average of over 70%. By reducing its reliance on securities brokerage fees, KGI put itself in a better position to handle the intensifying competition after the full liberalization of brokerage fees. KGI’s gains on trading in securities and derivatives, which represented 20%-30% of its total revenues over the last few years, were derived from a variety of activities, including bond dealing, private repos, derivative warrants (DWs), over-the-counter (OTC) derivatives, and investments in debt and equity securities for the company’s own account. KGI also has a recurring source of revenue from the fund management segment, through its 99% ownership of ONE Asset Management Co., Ltd. (ONEAM). Revenues from fund management, which represented 14% of total revenues in 2014, are typically less volatile compared with other sources of revenue in the securities industry.
KGI is considered one of the industry leaders in terms of product innovation. KGI can utilize KGI Taiwan’s financial engineering know-how and experience in the more-developed Taiwanese financial market. This secures KGI a competitive edge in product development in Thailand. By offering a wide range of products, KGI can attract different groups of investors as clients. KGI strives to stay ahead of its competitors by launching innovative financial products. KGI can then enjoy higher profit margins on the new products before competition crowds the market.
KGI’s market share, in terms of securities brokerage trading volume, for the first five months of 2015 was 3.99%, good for eighth place in the industry. This is close to the level KGI achieved in 2013, but less than a share of 4.28% (seventh place) in 2014. KGI’s brokerage client base is concentrated in Internet trading accounts, which charge low commission rates. KGI’s average commission rate, therefore, declined from 15 basis points in 2011 and 2012 to 11 basis points in 2014. The securities brokerage trading volume from KGI’s 20 largest clients decreased from 40% of its total trading volume in 2013 to 33% in 2014, excluding proprietary trading. KGI reduced its reliance on large accounts, which have higher bargaining power over commission. This action makes KGI’s market share less vulnerable to competition than in the past.
KGI’s proprietary trading activity exposes it to a certain level of market risk. Its investment portfolio, one of the largest in the industry, includes both fixed income and equity securities. However, a large proportion of KGI’s gains on trading are derived from selling financial products, such as DWs and other OTC derivatives. With the proper hedging strategies, the market risks from issuing these types of financial products are relatively low. As for its credit risk exposure, KGI’s margin loan portfolio as of March 2015 was Bt1.8 billion or 3% of total industry-wide margin lending and around 34% of the value of KGI’s equity.
KGI’s net profit in 2014 decreased to Bt762 million, compared with Bt784 million in 2013. The drop in net profit was mainly due to a drop in brokerage fees. At the end of 2014, the level of financial leverage, as measured by the ratio of adjusted assets to equity, rose to 1.7 times, compared with 1.3 times at the end of 2013. KGI’s net capital ratio (NCR) has been historically strong. It stood at 116% at the end of 2014, much higher than peers, and much higher than the regulatory minimum of 7%.
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