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 Bangkok Bank PLC (BBL). 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, 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 commission rates from intensifying competition.
The “stable” outlook reflects the expectation that BLS will maintain its status as a highly strategic subsidiary of the BBL Group and continue to receive strong support from its parent bank.
The rating and/or outlook of BLS could be revised upward or downward, should there be any changes in BBL’s credit profile or if TRIS Rating perceives any significant change in the degree of support BLS receives from BBL.
BBL is one of the leading commercial banks in Thailand, with the largest customer base and a nationwide coverage of branches and services. BBL received an international scale rating by Moody’s Investors Service at “Baa1”, and by S&P Global Ratings at “BBB+”. Both rating agencies have issued a “stable” outlook for BBL.
As a part of the 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. Around 50% of BLS’s new brokerage accounts in 2015 and the first half of 2016 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 forms 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 shortfall.
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 6.7% in 2015 and a slight decrease to 6.6% in the first half of 2016. 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 the 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 Bt1,785 million at the end of June 2016, representing 23% of its own equity and 3% 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’s profitability has been strong relative to its peers. BLS reported net profit of Bt1,136 million in 2015, up 13% from Bt1,004 million in 2014. Its performance was better than peers. Many peers showed drops in profit in 2015 due to weakness in the securities industry. Because the amount of underwriting transactions fell in the first half of 2016, BLS’s net profit decreased 35% to Bt477 million, compared with Bt737 million for the first half of 2015. BLS’s operating expenses are low relative to its peers. The ratio of operating expenses to net revenues was 47% for BLS in the first half of 2016, lower than the industry average of 64%.
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, the margin loan portfolio, and the DW business. BLS paid no dividend to its shareholders based on its performance in 2011 through 2013, but paid Bt432 million dividends in 2014. As of June 2016, shareholders’ equity stood at Bt7,700 million, compared with Bt1,900 million as of December 2011. BLS is among the top five brokers in terms of its equity base. BLS ended 2015 with a net capital ratio (NCR) of 209%, which was much higher than the regulatory requirement of 7%.
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