TRIS Rating affirms the company rating on Krungsriayudhya Card Co., Ltd. (KCC) and the ratings on KCC’s senior unsecured debentures at “AAA”. The ratings reflect KCC’s status as a core subsidiary of Bank of Ayudhya PLC (BAY), a commercial bank with branches throughout Thailand rated “AAA” with a “stable” outlook by TRIS Rating. The ratings also recognize KCC’s strong management team and its lead position in the credit card business.
KEY RATING CONSIDERATIONS
Support from BAY
TRIS Rating considers KCC as a core member of the BAY Group. KCC is fully-owned by BAY. It is a solo-consolidated subsidiary of the BAY Group under the consolidated supervision guidelines implemented by the Bank of Thailand (BOT). The company operates as a business unit, closely collaborating and aligning with “Krungsri Consumer”, one of BAY’s main businesses and customer bases. In addition, KCC has fully integrated its operations with BAY’s and has successfully performed in line with BAY’s expectations.
KCC is closely supervised and monitored by its parent bank, BAY, and, as such, is indirectly controlled by the BOT. Regulated by the same criteria set by the BOT, KCC employs a prudent operating system as well as a rigorous risk management system. The ratings also reflect KCC’s high level of financial liquidity and flexibility as a solo-consolidated subsidiary. KCC receives adequate ongoing financial support from BAY in the form of credit facilities.
In terms of business cooperation, KCC utilizes the bank’s nationwide branch network as a channel to expand its client base and to facilitate payments and services. Over 50% of KCC’s new cards over the past few years came through the channel of BAY’s branches. BAY also supports KCC with centralized and standardized systems for risk management, internal controls, and information technology (IT) systems.
Established position in the credit card industry
KCC has maintained its leading market position in the credit card business with an 11% market share of outstanding receivables over the past few years. With over 15 years of experience in the credit card industry, KCC has developed a proficient management team and a strong business platform. The loan portfolio grew significantly to Bt47,203 million in 2017 from Bt29,502 million in 2012, a compound annual growth rate (CAGR) of 10%.
Good asset quality and conservative provisioning policy
KCC has strong underwriting and collection systems as evidenced by the ratio of non-performing loans (NPLs are loans more than 90 days past due) to total loans (NPL ratio). KCC maintained its NPL ratio for credit cards at 0.9% at the end of 2017, lower than the industry average of 2.1%. The results are similar for personal loans. KCC reported an NPL ratio for personal loans at 2% at the end of 2017, lower than the industry average of 2.5%. KCC provides personal loans for its credit card customers only.
The company has maintained a conservative provisioning policy by setting the ratio of the allowance for loan losses against total loans at 6.1% since December 2017, making the NPL coverage ratio (the ratio of the allowance for doubtful accounts to NPLs) rise to 619% at the end of 2017. This percentage is expected to be enough of a cushion against any potential adverse change in the operating environment and the implementation of IFRS9 in 2020.
Profitability continuously improving
KCC’s financial performance has been moving in a positive direction. Net income jumped to Bt1,700 million in 2017, from Bt1,427 million in 2016. The return on average assets (ROAA) was 3.6% in 2017, improving from 3.2% in 2016. KCC’s net income for 2016 accounted for 7.3% of BAY’s consolidated net income for the same period. KCC’s performance is, however, pressured by the intensely competitive operating environment in the consumer loan industry. The implementation of a new regulation by the BOT on 1 September 2017 particularly concerning the decreasing interest rate ceiling, has partly constrained the company’s profitability. There is still an uncertainty in economic conditions which might affect KCC’s loan quality. However, TRIS Rating expects KCC will adapt and deliver an acceptable financial performance.
Adequate equity base
Under the Foreign Business Act, KCC is required to maintain sufficient paid-up capital in order to keep its total liabilities equal to or no more than 7 times its paid-up capital. According to its financial covenant, KCC has to keep its interest-bearing debt (IBD) to equity ratio below 6 times. The ratio of shareholders equity to total assets remained steadily high at 23.4%, while the ratio of total debt (IBD) to total shareholders’ equity was 2.2 times at the end of 2017. The total liability to paid-up capital ratio was 5.4 times at the end of 2017.
RATING OUTLOOK
The “stable” rating outlook reflects the expectation of TRIS Rating that KCC will maintain its status as a core subsidiary of the BAY Group and will continue to receive strong support from BAY.
RATING SENSITIVITIES
KCC’s credit profile could be revised downward if the BAY Group’s credit profile changes or TRIS Rating has any change on the view regarding the importance of KCC to the BAY Group or the degree of support provided by BAY to KCC.
COMPANY OVERVIEW
KCC was established in 1996 and later became a joint venture between BAY and GE Capital (Thaliand) Ltd. (GE Capital). In 2001, it was responsible for all credit card business of the BAY Group. KCC became a wholly-owned subsidiary of BAY in 2010 after BAY acquired all consumer loan business of GE Money in 2009. In April 2009, BAY completed the acquisition of AIG Retail Bank PLC (AIGRB) and AIG Card (Thailand) Co., Ltd. (AIGCC). BAY's acquisition of both entities resulted in an increase of approximately 222,000 credit cards which were transferred to Ayudhya Card Services Co., Ltd. (AYCS). AYCS transferred its entire business to KCC on 24 July 2013 having already registered its dissolution. In March 2012, BAY completed its acquisition of the retail business of HSBC, Bangkok branch, after of which BAY received the transfer of personal loan, home loan, deposit, and bill of exchange businesses. Through BAY, KCC received the transfer of HSBC’s credit card business. The acquisition of HSBC accelerated the growth of KCC’s portfolio.
In the beginning of 2014, there again were some major changes in the company’s business model after the Mitsubishi UFJ Bank, Ltd. (MUFG Bank) became the major shareholder of BAY instead of GE Capital. According to the Krungsri Group’s business strategy, KCC held the largest credit card portfolio of “Krungsri Consumer”.
KCC is BAY’s core subsidiary in the “Krungsri Consumer” Group which is assigned to be the flagship for providing credit card services in BAY’s retail loan business. KCC’s credit cards are issued under the name “Krungsri Card” and co-branded with Home Product Center PLC (HMPRO) under the name “HomePro Card”, AIA Thailand under the name “AIA card”, and Manchester United Thailand under the name “MANU card”. In 2016, KCC launched Krungsri JCB Platinum in response to the lifestyle of its target customers, who love travelling, particularly to Japan. KCC has gained competitiveness in terms of strategic partners in Japan thanks to leverage from its ultimate major shareholders, MUFG.
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