TRIS Rating has upgraded the company rating of DBS Vickers Securities (Thailand) Co., Ltd. (DBSVT) to “AA-” from “A-” with “stable” outlook. The rating is enhanced from DBSVT’s stand-alone rating. The upgraded rating reflects the result of TRIS Rating’s reassessment of the degree of support DBSVT receives as a highly strategically important subsidiary within DBS Group, according to our new group rating methodology published on 10th July 2015.
DBSVT’s stand-alone rating is based on DBSVT’s business operation as part of the DBS Group’s securities business in Asia, leveraging the access to the DBS Group’s client base and resources throughout Asia. The strengths are, however, constrained by DBSVT’s high operating expenses and its tight capital position compared with its peers in the local securities industry. In addition, the stand-alone rating is constrained by the inherently cyclical nature of the securities industry and intense competition, which have squeezed brokerage commission rates.
The “stable” rating outlook reflects the expectation that DBSVT will remain a highly strategically important subsidiary of the DBS Group and continue to operate as an integral part of the DBS Group’s securities business in Asia.
The credit profile of DBSVT could be affected by a negative change in the credit profile of the DBS Group or any change in group structure that changes our view on the degree of group support.
DBSVT is a wholly-owned subsidiary of DBS Vickers Securities Holding Pte. (DBSVH), the securities arm of the DBS Group. From the perspective of the DBS Group, DBSVT is a strategically important subsidiary in Thailand that provides research, brokerage, and other services to serve clients in the DBS Group’s network of affiliated companies. DBSVT’s business operation and its risk management framework are closely controlled by its parent company to ensure DBSVT complies with the group’s objectives and standards. DBS Group provides DBSVT with both financial and managerial supports. DBS Bank is rated by Moody’s Invester Service at “AA+” with a “negative” outlook, and by Standard and Poor’s at “AA-” with a “stable” outlook.
DBSVT has derived over 50% of its annual securities brokerage trading volume from the DBS Group over the past few years. DBSVT’s market share in the foreign investors segment has remained strong. However, trading transactions in the foreign investor segment are mostly executed through the Direct Market Access (DMA) system at commission rates lower than those of traditional orders. 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, before climbing back to 2.6% in 2015 and 2.9% in the first quarter of 2016.
Revenues from securities and derivatives brokerage accounted for 73% of DBSVT’s total revenues in 2015, compared with the industry average of 67%. Fee and service income has been growing but remains small, contributing only 3% of DBSVT’s total revenues in 2015. DBSVT has tried to build its high networth client base, for which DBSVT expects to provide value added services having higher fee income from the sale of private funds and other investment products. 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 Bt1.8 billion at the end of December 2015, representing 172% of its own equity and 3% market share of industry-wide margin lending. TRIS Rating views that DBSVT has adequate risk management 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 and a loss of Bt28 million in 2015, compared with a net profit of Bt108 million in 2013. High operating expenses have put pressure on profitability. Moreover, its cost structure is relatively rigid, causing profits to fall sharply when revenues decline. DBSVT’s operating expenses ranged from 73%-78% of net revenues from 2011 through 2013. The ratio rose to 93% and 99% of net revenues in 2014 and 2015, respectively, when its net revenues rose by just 1.6% from 2014 to 2015. In contrast, the industry average ratio of operating expenses to net revenues ranged from 54%-64% annually for 2012-2015.
DBSVT has plenty of credit facilities made available by several local financial institutions. The credit facilities are considered adequate to fund its operations and cover any liquidity shortfalls. The company also has a credit line from its parent company which further enhances its financial flexibility. As of December 2015, DBSVT had Bt1.04 billion in shareholders’ equity. The degree of financial leverage, as measured by the ratio of adjusted assets to equity, was around 266%, higher than peers. DBSVT’s net capital ratio (NCR) stood at 51% at the end of 2015, compared with the minimum regulatory requirement of 7%.
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