TRIS Rating Co., Ltd. has affirmed the company rating of DBS Vickers Securities (Thailand) Co., Ltd. (DBSVT), a wholly owned subsidiary of DBS Vickers Securities Holdings Pte., Ltd. (DBSVSH) in Singapore, at “A-” with “stable” outlook. The rating reflects an enhancement from DBSVT’s stand-alone credit profile to accredit its status as a strategically important member of the DBS Group, which provides DBSVT with both financial and non-financial supports. The rating is based on DBSVT’s ability to utilize the network and resources of the DBS Group as well. The rating also takes into account DBSVT’s adequate capital base and ample liquidity, which provide DBVST with a cushion to absorb normal business downside risk. However, these strengths are partially offset by stiff competition among securities brokers in Thailand and unpredictable downside risk from the volatility of the Thai stock market.
The “stable” outlook reflects the expectation that DBSVT’s status as a strategically important entity of the DBS Group will remain unchanged. The company is likely to continue to play a role in Thailand’s securities market as part of the DBS Group’s international network. The company’s performance is likely to remain sensitive to capital market conditions and regulatory changes, but unlikely to change DBSVT’s business strategy or the DBS Group’s implicit support for the company.
TRIS Rating reported that DBSVT provides brokerage services as its core business, supported by other non-brokerage services, including financial advisory, equity underwriting, and wealth management. In the brokerage business, DBSVT faced a gradual decline in market share over the past four years: from 3.3% in 2003 to 3.1% in 2004, 2.9% in 2005, and 2.8% in 2006 and 2007. The drop in market share was mainly due to increasingly competitive market conditions, which resulted in lower trading volumes from its top accounts. Additionally, the drop in volume from overseas investors pushed market share down to 2.2% as of June 2008 despite an increase in year-on-year market turnover during the first half of 2008. This drop was mainly from the increasing competition, especially foreign brokerage firms who have a Direct Market Access (DMA) trading system. The new system allows institutional investors to trade directly and pay a lower brokerage fee than the traditional channel. As a result, for the first half of 2008, DBSVT ranked 22nd in terms of market share among 38 brokerage companies, down from 15th for the entire 2007. However, based on the support from DBS Group, the company is expected to regain market share from overseas investors. Additionally, the retail client base is expected to be enlarged through Internet trading, stronger wealth management teams, and the company’s policy to expand margin loans.
In the investment banking business, DBSVT targets and focuses on medium-sized firms. The total size of equity underwriting deals done by DBSVT grew from Bt582 million in 2004 to Bt2.38 billion in 2005 due to its strength in property funds. However, during 2006-2007, the amount of underwriting significantly declined due to poor stock market conditions that were not conducive to new issues. DBSVT underwrote two deals in 2006 with a total deal size of Bt1.25 billion. The two deals underwritten in 2007 were worth only Bt74 million. However, the investment banking business turned around during the first half of 2008 after landing the Asiasoft PLC deal worth Bt840 million. As investment banking is highly related to prospects for the stock market, DBSVT is also expanding to offer other advisory services including mergers and acquisitions (M&A), and financial advisory work through the resources and international franchise network of its parent company. However, the revenue contribution from these activities remains small.
Net profit gradually declined from Bt305 million in 2004 to Bt209 million in 2005, Bt172 million in 2006 and Bt132 million in 2007, due to unfavorable market conditions and increasing competition among securities firms. During the first half of 2008, DBSVT reported a net profit of Bt67 million, compared with Bt57 million in 2007. The improved result reflected a better market environment and higher trading volume compared with the same period in 2007. However, the company faces a major challenge to sustain the improved performance during the second half of the year. The challenge comes as a result of unfavorable market conditions during the third quarter of 2008 due to the US subprime crisis, the Thai political situation, and “Turnover List” measures implemented by the Stock Exchange of Thailand (SET) to discourage speculative trading. The daily average trading volume on the SET during July to September 2008 was around Bt12,000 million, down from a daily average of trading volume of around Bt20,000 million for the first half of 2008.
DBSVT’s total assets increased significantly from Bt1.59 billion in 2006 to Bt1.87 billion in 2007 and to Bt2.61 billion as of June 2008. This remarkable increase arose from higher market trading volumes and a significant expansion of the margin loan portfolio. Outstanding margin loans increased sharply from Bt525 million in 2006 to Bt1,143 million in 2007 and increased further to Bt1,407 million or 54% of total assets as of June 2008. The policy to maintain a high level of margin loans could raise the market share of retail customers. However, the loan expansion could result in significant non-performing loan provisions or write-offs as the stock market remains volatile. Based on the current amount of outstanding margin loans, the company still has a sufficient capital to cover any losses from margin loan transactions. As of June 2008, the company’s net capital rule (NCR) was 62.24%, far above the requirement of the Securities and Exchange Commission (SEC) of Thailand.
DBSVT has only a small exposure on its investments, Bt14 million in common stock of TSFC Securities Ltd. (TSFC), which was a mandated poll-fund for all financial institutions to subsidize the establishment of TSFC. Liquidity and financial flexibility remains sufficient, even after DBSVT started utilizing credit facilities from various financial institutions to finance the margin loan portfolio expansion. As of September 2008, the company utilized 30% of the total credit facilities worth Bt2.3 billion; most of the credit lines are call loans from financial institutions. However, TRIS Rating expects the DBS Group to provide timely financial support to the company if required. The company’s capital base is considered adequate despite a decrease from Bt1,273 million as of December 2007 to Bt1,063 million as of June 2008. The drop was due to a Bt277 million extra dividend payment, the first dividend paid since 2005, said TRIS Rating. -- End
Company Rating: Affirmed at A- Rating Outlook: Stable
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