Bangkok--25 Nov--TRIS Rating
TRIS Rating has upgraded the company rating of TSFC Securities PLC (TSFC) to "BBB-" from "BB+" with a "stable" outlook. The upgraded rating reflects TSFC's strengthened capital base, sustained profitability, improved financial flexibility, continual improvements in its internal credit risk management system, and the financial support from its largest shareholder, the Stock Exchange of Thailand (SET). However, the rating is constrained by two factors: increasing competition in its main line of business -- margin loans, and the high volatility in the Thai stock market. The rating also reflects a mismatch in some of TSFC's asset and liability structures. The rating takes into consideration the company's strategic decision to become a short-term liquidity provider to securities companies. The success of new endeavor has yet to be proved.
The "stable" outlook is based on TRIS Rating's expectation that TSFC will sustain its current financial performance and its market share in margin lending. In addition, TRIS Rating expects the new product, providing liquidity to securities companies, will generate additional income as planned. TRIS Rating also expects TSFC will continue to receive ownership support from the SET as its major shareholder.
The possibilities for a rating and/or outlook upgrade for TSFC are limited. The rating and/or outlook of TSFC could be negatively impacted if intense competition or stock market volatility cause TSFC's performance to deteriorate. In addition, if the mismatch between TSFC's assets and liabilities increased much beyond the current levels, this would be a downward factor for the rating. TSFC raised new equity capital in July 2014, strengthening its equity base. On 22 July 2014, TSFC raised Bt532 million through a private placement with its major shareholders, the SET, the Ministry of Finance (MOF), and the Government Savings Bank (GSB). TSFC's shareholders' equity increased from Bt1,016 million to Bt1,549 million. The SET is the largest shareholder of the company, owning a 40.65% stake, followed by the MOF (10.56%), and GSB (9.5%). The other shareholders are commercial banks (11.89%), securities companies (10.9%), asset management funds (9.7%), insurance companies (2.82%), and others (0.03%). The ratio of shareholders' equity to total assets strengthened from 29.3% in 2009 to 52.39% as of June 2015.
TSFC was badly hit by the financial crisis in 2008, due to net unrealized losses from investments in securities held for trading. After the restructuring in April 2009, TSFC's business and financial profile had not rebounded as expected, due to greater competition in the margin loan segment. However, TSFC's financial profile has recovered since 2013, and is now stronger than TRIS Rating's expectation. The stronger capital base will support its plan to expand. Net profit increased to Bt25 million in 2013, Bt41 million in 2014, and Bt37 million for the first half of 2015.
As of June 2015, TSFC's total assets were Bt3,145 million, of which 88% were net margin loan receivables (Bt2,753 million). The company has faced challenges in its core business for two main reasons: changing market conditions, the competitive response to TSFC's re-entry into margin lending. From 2010 to June 2015, other securities brokers have rapidly expanded their margin loan portfolios. The total amount of outstanding margin loans industry-wide grew to Bt59 billion as of June 2015, from Bt16 billion in 2009. The financial crisis in 2008 slashed TSFC's margin loan portfolio from Bt6,377 million in September 2008 to Bt2,666 million in June 2015. Its market share nosedived from 24% in September 2008 to 4.5% in June 2015. TSFC's market share plummeted because its funding costs were higher than its competitors.
After the capital injection in July 2014, TSFC has been able to reduce its funding cost by seeking new long-term credit lines to refinance its high-cost borrowings. The company now has better financial flexibility and a competitive funding cost. As of June 2015, the company had a total of Bt6.39 billion in credit facilities made available from several local financial institutions.
In terms of asset quality, in 2013, TSFC developed and implemented more stringent criteria for granting margin loans. The new criteria reflect the different risk levels of the stocks pledged as collaterals. The new criteria also limit TSFC's exposure to loan concentration risk. TRIS Rating expects that TSFC will be able to control the credit risk of its margin loans by strictly enforcing margin calls and forced sales, and by maintaining its stringent criteria on collaterals and underwriting.
TSFC plans to start offering loans to securities companies, a product it used to offer. These types of loans affirm TSFC's mission to act as a liquidity provider to securities companies. However, the new type of loan poses some risk management challenges. In addition, TSFC has a short track record in this segment.
TSFC Securities PLC (TSFC)
Company Rating: BBB-
Rating Outlook: Stable