TRIS Rating has affirmed the company rating of Bualuang Securities PLC (BLS) at “AA-” with “stable” outlook. BLS’s rating is enhanced from its stand-alone credit profile to reflect its status as a highly strategic subsidiary of the Bangkok Bank (BBL) Group. The stand-alone rating is based on BLS’s solid franchise in the securities business, the strength and diversity of its lines of business and revenue base, its conservative style of management, and the financial flexibility it has as a subsidiary of BBL. The rating also takes into consideration the potential benefits BLS may be able to realize by further leveraging the BBL Group’s nationwide network and business relationships. The rating is, however, constrained by the cyclical and volatile 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 BLS will maintain its status as a highly strategic subsidiary of BBL Group and continue to receive strong support from its parent bank.
The ratings and/or outlook for BLS could be revised upward or downward, should there be any changes in BBL’s credit profile or if our view on the degree of support changes.
BBL is one of the leading commercial banks in Thailand, with largest customer base and nationwide coverage of branches and services. BBL receives international scale rating by Moody’s Investors Service at “Baa1”, and by Standard and Poor’s at “BBB+”. Both rating agencies have issued a “stable” outlook for BBL.
As a part of BBL Group’s strategy to strengthen its universal banking platform, BBL raised its shareholding in BLS from 56.34% to 99.75% in 2012. BBL aims to fully utilize BLS’s capital market expertise to provide the Group’s clients with end-to-end financial services for all their funding and investment needs. In addition, with the larger stake in BLS, BBL can more efficiently manage the capital employed within the Group and provide BLS with a larger amount of funding when needed.
BLS can benefit several ways as a subsidiary of BBL. BLS uses BBL’s branches as one of the main channels by which to expand its retail client base. Over 40% of BLS’s new brokerage accounts in 2014 and the first half of 2015 came through referrals from BBL, up from one-fourth in 2012. BBL has long-standing relationships with many large business groups. Because of these relationships, BLS has an edge in servicing institutional brokerage clients through privileged corporate access and in securing investment banking transactions. These types of support give BLS an advantage over other securities firms which are not affiliated with a commercial bank. Moreover, BLS has received financial support from BBL in the form of credit facilities. BLS has been granted a large credit line from BBL. The total amount of available credit should be enough to fund BLS’s operations and cover any liquidity shortfalls.
BLS has a strong market position in securities brokerage, with 4%-5% market share in terms of trading value, over the last five years. Its average commission rate has stayed above the industry average. Its share of industry-wide securities brokerage fees has grown steadily, from 3.5% in 2007 to 7.1% in the first half of 2015. BLS also has a leading market position in investment banking. Revenues from investment banking, which include underwriting fees and financial advisory fees, averaged over Bt300 million per year for the last three years. BLS’s revenues from investment banking are among the highest in the industry, ranking it among the top five brokers during the last five years.
BLS has limited exposure to market risk. BLS, in accordance with its policy, engages in proprietary trading only for arbitrage purposes and only to hedge its positions in its derivative warrant (DW) segment. BLS launched its first DW products in 2010 and is currently the market leader in this segment. BLS employs a dynamic delta hedging strategy to mitigate the price risk of the underlying assets for the DWs. TRIS Rating expects BLS will maintain an effective hedging and risk management system, which will prevent BLS from experiencing major losses from the DW products it offers. As for credit risk exposure, BLS’s margin loan portfolio stood at Bt1,177 million at the end of June 2015, representing 17% of its own equity and 2% of industry-wide margin lending. TRIS Rating expects BLS to control the credit risk of the margin loans it has made by strictly enforcing margin calls and forced sales, and by maintaining its stringent criteria on collateral and underwriting.
BLS reported net profit of Bt1,188 million and Bt1,004 million in 2013 and 2014, respectively. As a result of large amount of underwriting transactions for the first half of 2015, BLS’s net profit increased 81% to Bt737 million, compared with Bt407 million for the first half of 2014. BLS’s profitability has been strong relative to its peers. Operating expenses remain under control, at 49% of net revenues in 2014 and 39% of net revenues for the first half of 2015, lower than the industry average of 60%.
BLS’s equity base has been growing fast since it became a fully-owned subsidiary of BBL. The equity base is now one of the largest in the industry. BLS raised Bt1.6 billion in new equity capital in November 2013. The company intends to use the new capital to expand its underwriting capacity, its margin loan portfolio, and the DW business. BLS paid no dividend to its shareholders based on its performance in 2011 through 2013, and paid Bt432 million dividends for the performance in 2014. As of June 2015, shareholders’ equity stood at Bt6.7 billion, compared with Bt1.9 billion as of December 2011. BLS ended 2014 with a net capital ratio (NCR) of 170%, which was much higher than the regulatory requirement of 7%.
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