TRIS Rating has assigned a rating of “BBB” to the proposed issue of up to Bt3,000 million in hybrid Tier 2 capital securities of Kiatnakin Bank PLC (KK). At the same time, TRIS Rating has affirmed the company rating of KK and the ratings of KK’s existing senior unsecured debentures at “A-”. The outlook remains “stable”. The ratings reflect KK’s expertise in its core business segments: auto hire-purchase lending and capital markets. The ratings take into account KK’s broadening 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 current slowdown of the Thai economy and sluggish domestic auto sales remain the major factors which may limit KK’s growth and profitability.
The “BBB” rating for KK’s new hybrid Tier 2 capital securities reflects the subordination risk of the securities and the nonpayment risk of the securities, as defined by the non-viability loss absorption clause in the bond indenture. The features of the securities comply with the BASEL III guidelines, and the securities are qualified as Tier 2 capital under the criteria of the Bank of Thailand (BOT). However, the securities will be classified as Tier 2 capital, subject to approval from the BOT. The securities are subordinated, unsecured, non-deferrable, and non-convertible. The securities are also callable by KK prior to the maturity date, if the call date is at least five years after issuance and as long as the bank has received approval from the BOT. The holders of the securities are subordinated to KK’s depositors and holders of KK’s senior unsecured debentures. The principal of the securities can be written down in the event that the regulator deems the bank to be non-viable and decides to provide financial support to the bank, in accordance with the non-viability clause.
The “stable” outlook reflects the expectation that KK will sustain its current level of profitability and its current 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. 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 as long as the Thai economy remains weak.
KK was ranked 12th among 18 Thai commercial banks, in terms of consolidated asset size, as of September 2015, with a 1.6% market share in loans, and a 1.0% 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 the KKP Group an enhanced competitive edge in the capital markets 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 markets 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’s loan portfolio continues to contract because of the limited prospects for auto sales and hire-purchase lending in Thailand, as well as the current slowdown in the Thai economy. As of September 2015, KK’s loans and receivables totaled Bt177.8 billion, a 4% decrease from December 2014. KK faces loan concentration risk because of its strategic focus on a niche market. The bank’s two largest loan portfolios were auto hire-purchase lending (around 68% of total loans) and loans to the real estate and construction sector (21%). 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 more than 40% 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 may cause KK’s loan quality suffer if the economy worsens.
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 Bt5.6 billion in 2012 to Bt11.6 billion at the end of September 2015. As of September 2015, the ratio of NPLs to total loans was 6.5%, higher than the industry average. KK’s loan loss reserves, as a percentage of the regulatory minimum requirement, was 155%, below the industry average.
In 2014, KK delivered net profits of Bt2.7 billion, down by 40% year-on-year (y-o-y). Return on average assets (ROAA) fell from 1.84% in 2013 to 1.08% in 2014. KK’s profitability declined largely as a result of a decline in fee-based income and an increase in its credit cost. However, KK’s financial performance improved slightly in 2015. For the first nine months of 2015, the bank reported net profits of Bt2.4 billion, up 5% y-o-y. 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’s level of capital funds remains high, and sufficient to fund its future growth plans. As of September 2015, KK reported a Tier 1 capital ratio of 14.53% and a total capital ratio (BIS ratio) of 14.91%, above the minimum requirements of 6.00% and 8.50%, respectively, set by the BOT.
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