TRIS Rating Co., Ltd. has affirmed the company and issue ratings of Kiatnakin Bank PLC (KK) at “A-” with “stable” outlook. The ratings reflect the bank’s experienced management team, acceptable risk management and practices, good track record of improving asset quality, more diversification of retail funding base, and strong capital fund. However, the ratings are constrained by its limited franchise value and unforeseen risks of funding market change impacted by the Deposits Protection Act (DPA) implementation, which will be effective in August 2012. In addition, the downside risks from the uncertainty of economic and political environments and intense competition in both banking and securities businesses might limit KK’s business growth and profitability in the future. As it is a typical model for a small bank, KK’s asset and deposits structures are not well diversified, and will limit its competitiveness in the long term.
The “stable” outlook reflects the expectation that KK will be able to sustain business growth and profitability in the medium term. The outlook also reflects the bank’s ability to control asset quality and maintain sufficient capital funds to absorb downside risks due to uncertainty of economic and financial environment in the future. However, the rating outlook might be pressured from deteriorated asset quality and unforeseen risks of unstable retail deposit base effected from DPA implementation.
TRIS Rating reported that KK was ranked 11th in terms of assets, with a 1.5% market share in loans and 1.3% in deposits as of September 2009. KK’s core businesses in hire purchase, residential project lending and distressed asset management are well managed with high expertise and under controllable asset quality. As KK has the strategy to focus more on expanding good-quality assets, the bank has imposed more stringent credit policy and underwriting criteria. As a result, the loan portfolio as of September 2009 grew slightly by 4.6% from Bt80,812 million as of December 2008 to Bt84,594 million. Of the total, 68% was hire purchase lending, 23% was the residential project loans, and 9% was others. As of September 2009, hire purchase lending was flat, amounting of Bt57,549 million, compared with Bt57,139 million as of December 2008. Residential project loans increased by 11.5%, from Bt17,343 million to Bt19,349 million.
Due mainly to write-offs during 2006 to the first nine months of 2009 and attempts to control asset quality, KK’s non-performing loans (NPL) had consistently reduced since 2007. The ratio of classified loans (sub-standard, doubtful and doubtful loss) to total loans improved tremendously from 14.5% in 2006, to 12.3% in 2007, to 8.7% in 2008 and to 7.0% as of September 2009. This is slightly better than the industry average of 7.1% for the 12 universal banks. KK’s asset quality has been adversely impacted by residential project loans. Classified loans with more than three months pass due from residential projects was 21% of total residential project loans. KK’s non-performing asset (NPA) (classified loans with more than three months pass due, and the outstanding amount of troubled debt being restructured and foreclosed property) was 10.9% of total assets, which was better than an average of 11.9% for the 12 Thai universal banks. KK’s ratio of allowance for loan losses to the Bank of Thailand’s minimum requirement was 131%, lower than the industry average of 156% for the 12 universal banks as of September 2009. Although KK extends loans to sub-prime residential developers which are high credit risk assets, KK maintained adequate cushion of capital and allowances for doubtful accounts to absorb risks from a certain rise in NPAs. The ratio of NPA to capital fund plus allowance for doubtful accounts was 0.66 times, which was better than an average of 0.79 times for the 12 universal banks.
TRIS Rating said, KK was able to generate better income and sustain high yield from its core businesses, while succeeding in controlling of its operating cost. For the first nine months of 2009, KK reported net profits of Bt1,729 million, up 12.9% from Bt1,532 million for the same period in 2008. The ratio of operating expenses to total income declined slightly to 34% for the first nine months of 2009(from 35% for the same period in 2008), far lower than the industry average of 44% for the 12 universal banks. KK’s return on average assets slightly declined to 1.45% for the first nine months of 2009 from 1.58% for the same period in 2008, while the return on average equity slightly increased to 9.92% from 9.08%.
On the funding side, KK’s strategy to increase numbers of retail accounts with a smaller amount of deposits was reflected by an increase in a portion of savings deposits to 3.6% of total deposits as of June 2009 from 0.7% of total deposits as of December 2008. KK had a strong capital fund, as shown by its BIS ratio of 16.64% at the end of September 2009. As KK engages in high risk-high return lending, especially residential project loans, maintaining strong capital fund and allowance for doubtful accounts is crucial to absorb unexpected losses from future downside risks, said TRIS Rating. -- End
Company Rating: Affirmed at A- Issue Ratings: KK105A: Bt2,131 million senior debentures due 2010 Affirmed at A- KK10NA: Bt966 million senior debentures due 2010 Affirmed at A- KK115A: Bt1,289 million senior debentures due 2011 Affirmed at A- KK119A: Bt1,450 million senior debentures due 2011 Affirmed at A- Rating Outlook: Stable
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