TRIS Rating Co., Ltd. has upgraded the company rating of Kiatnakin Finance PLC (KK) and its issue ratings to "A-" from "BBB+". The ratings reflect the capability of KK's management team to continuously generate income from various sources, and KK's sound capital base which should provide sufficient cushion for its businesses. The ratings also take into consideration the strong loan loss provisioning that KK maintains. These strengths are partially offset by continued intense competition in the hire purchase industry and rising problem loans in the real estate sector. The "stable" outlook reflects the expectation that KK's management team will be capable of sustaining profits. The rating also reflects KK's experience in the hire purchase business and residential project loans, its new niche. With sufficient capitalization, KK has a high probability of becoming a commercial bank which would lead to both increased opportunities and greater competition from the expanded scope of the banking business.
TRIS Rating reported that since it resumed operations in 1998, KK has shifted its business strategy and capital allocation to the creation of satisfactory returns rather than simply growing the asset base. KK changed focus from the hire purchase business and began acquiring distressed loans auctioned by the Financial Sector Restructuring Authority (FRA) during 1999-2000. The distressed loans business not only delivered satisfactory returns, but also enhanced KK's specialization and experience in property management, which in turn, brought new business opportunities. Meanwhile, KK has applied its stringent asset evaluation and provisioning policy to the portfolio of distressed loans it purchased.
KK's long experience in the hire purchase business has helped it expand its hire purchase loan portfolio easily in 2004. KK's hire purchase loan portfolio represents the highest portion of earning assets, with a total value of Bt18,606 million, or 27% of total assets, as of June 2004. Since the size of financial claims in the distressed assets business has declined from around Bt19,500 million in 1999 to around Bt10,400 million as of June 2004, KK has established a new business, residential project loans, since 2000. KK has utilized the experience and the managerial skill it gained from managing financial claims to evaluate the credit risk of these projects. Amidst the economic recovery, new mortgage and real estate loans will enable KK to generate additional income after its distressed loan management portfolio fades out. Residential project loans accounted around 21% of total assets, or Bt10,235 million, as of June 2004.
KK's total assets at mid-year 2004 were Bt48,606 million. The company's capital adequacy ratio increased from 12.9% in 1999 to 26.6% in June 2004. As of June 2004, KK's financial claims in its special assets that were purchased via auction from the FRA was Bt1,114 million higher than the cost of Bt9,340 million compared with December 2003 when the fair value stood at Bt1,002 million higher than the cost of Bt8,462 million. However, compared with three major finance companies, KK still has a higher non-performing loans (NPLs) to average loan ratio. KK's NPLs to average loan ratio as of June 2004 was 15.8%, higher than the listed finance company average of 13.7%. However, KK has never transferred its problem loans to the Thai Asset Management Corporation. The number of problem loans from residential projects raised the level of problem loans higher than in 2004 compared with the end of 2003. Management has a policy to maintain a sound capital base which is important for KK's credit rating. As the company engages in high risk/high return lending, especially residential project loans, problem loans have to be cushioned by a special reserves policy. For general lending, KK reserves an additional 20% of loan loss provisions for doubtful loans. For residential project loans, the company adds an additional 20% of reserves for sub-standard to doubtful loans, even though loan collateral covers the value of the debt. KK's actual loan loss reserve at the end of June 2004 was equal to 154.2% of the requirement of the Bank of Thailand, TRIS Rating said. - End
Kiatnakin Finance PLC (KK) Company Rating: Upgraded to A- from BBB+ Issue Ratings: KK069A: Bt1,500 million senior debentures 1/2002 tranche 1 due 2006 Upgraded to A- from BBB+ KK079A: Bt1,000 million senior debentures 1/2002 tranche 2 due 2007 Upgraded to A- from BBB+ KK073A: Bt1,000 million senior debentures 2/2002 due 2007 Upgraded to A- from BBB+ KK087A: Bt1,000 million senior debentures due 2008 Upgraded to A- from BBB+ Rating Outlook: Stable