TRIS Rating has affirmed the company rating of Phatra Securities PLC (PHATRA) at “A-” with “stable” outlook. The rating reflects PHATRA’s status as a core subsidiary of ultimate parent company, Kiatnakin Bank PLC (KK, rated “A-/Stable” by TRIS Rating), due to its strong profit contribution and close linkage to the Kiatnakin Phatra Financial Group. The rating also 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 is, however, constrained by the cyclical and volatile nature of the securities industry and the downward pressure on commission rates from intensifying competition. 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.
The credit upside and downside scenarios depend on the rating of the parent company, KK. KK is unlikely to experience any credit upside in the near term, especially as long as the Thai economy remains weak. As a result, the credit upside of PHATRA is limited in the near term. On the other hand, the credit downside scenario depends on the importance of PHATRA to KK, or if the credit profile of KK weakens, PHATRA’s rating/outlook could be negatively impacted.
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. PHATRA receives both business and financial support from KK and has been expanding its client base by using KK’s client base, especially high net worth clients. KK granted PHATRA a large credit line because it is a subsidiary. This new source of funds has enhanced PHATRA’s financial flexibility. In addition, PHATRA generated around one-third of KK’s net profit, a significant contribution to the overall performance of the Group. We determine PHATRA is a core member of the Group.
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 2015 remained strong at 10.9% and 9.7%, respectively.
The other 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 Bt303 million a year (roughly 13% market share). After merging with KK, PHATRA can now 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.
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 activities. TRIS Rating expects PHATRA to maintain an adequate risk management system to cover its principal investment activities.
PHATRA’s profitability has been strong. PHATRA reported net profit of Bt1,052 million in 2015, up 30% from Bt811 million in 2014. Its performance was better than peers. Many peers showed drops in profit in 2015 due to weakness in the securities industry. PHATRA’s operating expenses are low, relative to its peers. The ratio of operating expenses to net revenues was 43% for PHATRA in 2015, compared with the industry average of 63%.
As of December 2015, shareholders’ equity stood at Bt6,007 million, 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 taken to offset the risk in the financial products it issued for clients. PHATRA ended 2015 with a net capital ratio (NCR) of 58%, compared with the regulatory requirement of 7%.
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