TRIS Rating has assigned a “A+” rating to the additional proposed issue up to Bt5,000 million in senior unsecured debentures due within ten-year of Krungthai Card PLC (KTC). Combining the remaining proposed issue and additional proposed issue, KTC has available proposed issue of up to Bt8,300 million senior unsecured debentures due within ten-year. At the same time, TRIS Rating has affirmed the company rating and the ratings of existing senior unsecured debentures and remaining proposed issue of up to Bt3,300 million due within ten-year senior unsecured debentures of KTC at “A+”. The outlook remains “stable”. The ratings reflect the enhancement from KTC’s stand-alone rating as KTC is a strategic important subsidiary of its parent bank, Krung Thai Bank PLC (KTB). KTC’s stand-alone rating has been supported by its continual improvement in its operating and asset quality during 2012-September 2016 which substantially strengthened the company’s financial profile. The ratings are, however, constrained by intense competitive operating environment in consumer loan industry and unfavorable economic environment which might affect KTC’s credit quality and profitability.
The “stable” outlook reflects the expectation that KTC will be able to maintain its market position and asset quality through efficient debt collection and strict underwriting policy, with the current leverage level. TRIS Rating also expects that KTB will continue to provide business and financial supports to KTC.
The credit upsides are limited in the next 12-18 months after the recent upgrades in March 2016. KTC’s ratings or outlook could be revised downward should there be any factors which would significantly affect KTC’s business or financial profiles such as deterioration in asset quality. Any change in the degree of support KTB provides to KTC or the strategic importance status of KTC to KTB would also affect the ratings and/or outlook.
KTC, a 49.45% subsidiary of KTB, has received support from its parent bank. As a company in the KTB Group, KTC has collaborated with KTB to have its business strategy to be aligned with the KTB Group. In terms of business cooperation, KTC continues to utilize the bank’s nationwide branch network as a channel to expand its client base and as channels for payments and services. KTC also receives ongoing financial support from KTB in the forms of credit facilities. The strong support has enhanced the importance status of KTC within the KTB Group which mutually increases the probability that KTB would provide extraordinary support to KTC, if required.
After the flood crisis at the end of 2011, KTC decided to bring debt collection back in-house, under its full control. The company has also put more emphasis on pre-delinquent collections. Efficiency has improved significantly, as evidenced by a continuous reduction in non-performing loans (over 90 days past due) of gross receivables ratio or the NPL ratio. The results are similar for both credit card personal loans. KTC reported the NPL ratio for credit cards of 1.4% at the end of September 2016, lower than the industry average of 3.7%. The NPL ratio for personal loans was 1% at the end of September 2016, lower than the industry average of 3.5%. Despite the drop in NPLs, the charge-off rate rose from 7.4% in 2012 to 9.4% (annualized) for the first nine months of 2016. The rise was partly due to a tighter provisioning policy. As a result, the ratio of the allowance for doubtful accounts to NPLs rose to 446% at the end of September 2016, up from 195% at the end of 2012. KTC increased the allowance for possible loan losses in order to prepare the company for any potential adverse change in the operating environment.
In May 2015, KTC decided to outsource debt collection service to Win Performance Co., Ltd. The ratio of operating expenses to total income of KTC increased to 39.6% for the first nine months of 2016 from 37.5% in 2014 and 39.5% in 2015. Although the debt collection is out of KTC’s control, TRIS Rating expects the outsourcing company can achieve a high collection rate while maintaining a high quality of service at a controllable cost.
KTC spent most of marketing effort and getting costs under control during the past few years. As a result, revenues grew continuously, KTC reported a net profit, excluding extraordinary items related to the sale of a long-term investment, of Bt1,037 million in 2013, Bt1,755 million and Bt2,073 million in 2014 and 2015, respectively. Net profit was Bt1,854 million for the first nine months of 2016, a 21% increase compared with the same period in 2015. The return on average assets (ROAA) improved to 4.1% (annualized) in September 2016, from 2.1% in 2013, excluding extraordinary items related to the sale of a long-term investment. The major efficiency improvements in 2012 and the abundant reserves from its conservative provisioning policy should enable KTC to maintain its profitability over the next few years
With its ability to access a diverse funding base, plus the financial support from KTB, short-term liquidity is not a major concern for KTC. Its portfolio is funded by borrowings from many financial institutions, and by debentures with a range of maturities. No loan from a single financial institution represents a significant portion of its overall borrowings. While KTC relies on borrowings from financial institutions and the debt market as its main funding sources, its commercial bank-backed competitors have access to relatively cheaper source of funding: bank deposits. However, the improvement of KTC’s performance, plus the downward trend of interest rate during the past three years, reduced its funding cost from 5% in 2012 to 3.3% (annualized) for the first nine months of 2016.
The improved operating results in 2012-September 2016 substantially strengthen KTC’s equity base, lowering the debt to equity ratio to 5.27 times at the end of September 2016. Given KTC’s modest dividend payout policy and future prospects, TRIS Rating expects KTC’s equity base to be maintained at this level over the next two to three years. However, the planned growth in KTC’s portfolio may cause it to borrow more and cause the leverage ratio to rise.
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