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-”. The outlook has been changed to “negative’ from “stable”. The rating is enhanced from DBSVT’s stand-alone credit profile to reflect its status as a strategically important subsidiary of the DBS Group, which provides DBSVT with both financial and non-financial support. The stand-alone rating is based on DBSVT’s ability to utilize the network and resources of the DBS Group, and also takes into account DBSVT’s adequate capital base and sufficient liquidity, which provide DBSVT with a cushion to absorb normal business risk. However, these strengths are partially offset by concerns over the company’s deteriorating market position in the stock brokerage business and its financial performance during the last three years which was lower than TRIS Rating’s expectation. The rating is also constrained by uncertainty of the Thai stock market and operating climate following the brokerage business liberalization in 2010 and the global capital market volatility. These might partly affect the company’s business and financial position in the future.
The “negative” outlook reflects DBSVT’s market position and financial performance in securities brokerage business during the last three year which was lower than TRIS Rating’s expectation. TRIS Rating will closely monitor the company’s operating performance and market position when the sliding brokerage commission scales implemented in 2010. Any future downturn in operating performance will negatively impact the rating. However, the success implementation of DBSVT’s wealth management business, as the company’s strategic plan, and the recovery of the market position to a sustainable level will support DBSVT’s credit strengths. TRIS Rating expects DBSVT to remain a strategically important entity of the DBS Group, sustain to play a role in Thailand’s securities market as part of the DBS Group’s international network and continue getting the DBS Group’s implicit support.
TRIS Rating reported that DBSVT provides brokerage services as its core business, as well as 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: share fell from 2.9% in 2005 to 2.8% in 2006 and 2007, and then declined sharply to 2.1% in 2008. The substantial drop in market share was mainly from increased competition, especially from foreign brokerage firms who have a Direct Market Access (DMA) trading system. However, even after DBSVT implemented the DMA system in 2008, volume from overseas investors dropped due to the global financial crisis. The overseas investors have contributed 40%-50% of the company’s trading volume during the last five years. Market share, therefore, slid to 1.9% for the first nine months of 2009, and DBSVT ranked 22nd in terms of market share among 38 brokerage companies, down from 15th for all of 2007. However, excluding the proprietary trade, the company’s market share was 2.2% for the first nine months of 2009, down from 2.4% in 2008 and 3.0% in 2007.
Based on the support from the DBS Group and the flow of investable fund resulting from liquidity injections by the US and EU governments, TRIS Rating said DBSVT might be able to regain market share from overseas investors. Regarding the retail client base, the company plan to enlarge the market share through Internet trading, wealth management teams, and a company strategy to expand margin loans. However, recovery of both the overseas and retail volume with stable contribution has yet to be monitored, after the sliding scale of brokerage commission is implemented in 2010. In the investment banking business, the company targets medium-sized firms. DBSVT was the lead underwriter for the Asiasoft PLC deal worth Bt840 million in 2008. This is a sharp turnaround from only Bt74 million in deals in 2007. However, the company had no fee-based income for the first half of 2009. As investment banking is highly related to prospects for the stock market, DBSVT is 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 was only 4% of total revenue for the last five years. The company does not expect any sizable amount of revenue from this business during the next 2-3 years.
Net profit gradually declined from Bt209 million in 2005 to Bt172 million in 2006 and Bt132 million in 2007, due to unfavorable market conditions and increasing competition among securities firms. In 2008, the company reported a net loss of Bt22 million due to substantial losses on margin loans, a direct result of the stock market turmoil during the last quarter of 2008. The unfavorable market conditions continued through the first quarter of 2009. DBSVT reported a net loss of Bt9 million for the first half of 2009. However, performance is likely to reverse for the second half of the year, because the market volume has improved since the second quarter of 2009. The average daily trading volume on the Stock Exchange of Thailand (SET) during April to September 2009 was around Bt21,000 million, up sharply from a daily average of trading volume of around Bt8,600 million for the first quarter of 2009.
DBSVT’s total assets ranged from Bt1.6-Bt1.9 billion during 2005-2008, before significantly increased to Bt2.31 billion as of June 2009. This remarkable increase arose from higher market trading volumes. However, outstanding margin loans remained flat at around Bt500 million from the beginning of 2008 through June 2009, due to the imposition of more stringent credit criteria. Margin loans outstanding were accounted for 31.3% of total assets in 2008 and 22.7% as of June 2009. However, the company plans to re-expand the margin loan portfolio when the opportunity arises, with the support from the DBS Group. The policy to maintain a high level of margin loans could raise the market share of retail customers. However, the loan expansion could expose the company to higher credit risk, particularly when the company has high concentration risk on large customers. 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 2009, the Net Capital Rule (NCR) was 49.56%, far above the requirement of the Securities and Exchange Commission (SEC) of Thailand.
TRIS Rating said, DBSVT has only a small exposure from its own investments. DBSVT invested Bt14 million in shares of TSFC Securities Ltd. (TSFC). This investment was a mandated poll-fund for all financial institutions to subsidize the establishment of TSFC. The investment was totally written off during the first half of 2009. Liquidity and financial flexibility remains sufficient, even after DBSVT started utilizing credit facilities from various financial institutions and the DBS Group to finance the margin loan portfolio expansion. As of August 2009, the company utilized 3.0% of the total available credit facilities worth Bt2.3 billion from several financial institutions and had a Bt200 million of subordinated loan from the DBS Group. However, TRIS Rating expects the DBS Group to provide timely financial support if needed. DBSVT has an adequate capital base despite a decrease from Bt1,273 million as of December 2007 to Bt964 million as of June 2009. The drop was due to a Bt277 million extra dividend payment and from net losses from operations. -- End
Company Rating: Affirmed at A- Rating Outlook: Negative from Stable
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