TRIS Rating has upgraded the company rating of Thanachart Securities PLC (TNS) to “A+” from “A” with “stable” outlook. The upgraded rating reflects TRIS Rating’s reassessment of the degree of parental support TNS could potentially receive as a strategically important member of the Thanachart Group. The stand-alone rating is based on TNS’s experienced and prudent management team, ability to maintain the market position in its core business, and its sufficient liquidity and capital position. The rating also takes into account the benefits TNS could realize from further utilizing Thanachart Bank PLC’s (TBANK) nationwide branch network and corporate client’s relationships to strengthen its market position. The rating is, however, constrained by the inherently cyclical nature of the securities industry and the downward pressure on brokerage commission rates after the full liberalization of brokerage fees.
The “stable” outlook reflects the expectation that TNS will continue to receive the full support of TBANK and maintain its status as a strategically important member of the Thanachart Group. TRIS Rating expects TNS to maintain an adequate risk management system in order to control the credit risk of its margin loan portfolio. In addition, TRIS Rating expects TNS to regain its brokerage market share among foreign investors in the near future.
The rating and/or outlook for TNS could be negatively impacted if the intense competition or the volatility in the operating environment causes TNS’s performance to deteriorate more than expected. The rating of TNS could also be affected if the credit profile of TBANK becomes weakened. In contrast, the credit upside for TNS is limited, based on the current credit profile of TBANK.
TNS has maintained its market share in securities brokerage at 4%-5% over the last few years. The company’s market share of 4.5% in 2014 ranked it sixth among 33 active brokers. In 2013, TNS entered into a business alliance with Daiwa Securities Group Inc. (Daiwa), Japan’s second-largest securities firm. Under the terms of the alliance, TNS and Daiwa will distribute co-branded research to foreign institutional clients, with an aim to expand services to the clients in key markets in Asia, Europe, and the United States (US). This move should help TNS rebuild its foreign client base. TNS had very few foreign clients left after 2010, when it terminated a five-year business alliance with its previous foreign partner.
As a fully-owned subsidiary of TBANK and a strategically important member of the Thanachart Group, TNS receives both business and financial supports. TNS has been expanding its retail client base by using TBANK’s branches. Over 30% of TNS’s new brokerage accounts were acquired through referrals from TBANK during the last few years. TNS can also leverage TBANK’s various financial services to provide total solutions to its clients. In addition to the business support, TNS receives financial support from TBANK in the form of credit facilities. TNS has been granted a large credit line by TBANK. The business and financial supports give TNS an advantage over other securities firms which are not affiliated with a full-service commercial bank.
TNS has been carrying on its books with sizable equity investments in a few listed companies. As of December 2014, these investments were worth Bt1.6 billion. While these investments provide dividend income, they expose TNS to a certain level of market risk. Other than these investments, TNS has limited exposure to market risk. It mainly engages in proprietary trading for arbitrage purposes and for hedging its positions in derivative warrants (DWs), but not in speculative day trading. TNS’s credit risk exposure has risen as its margin loan portfolio has continued to grow. The value of the margin loan portfolio rose to Bt3.6 billion at the end of 2014, up from Bt3.1 billion a year earlier. The value of TNS’s margin loan portfolio in 2014 represented 6.4% of industry-wide margin lending and 112% of its own equity. TRIS Rating expects TNS could control the credit risk from margin lending by strictly enforcing margin calls and forced sales, and by maintaining its stringent criteria for collateral and underwriting.
TNS’s profitability has been strong and in line with its peers. Operating expenses remained under control, at 57% of net revenues in 2014, slightly lower than the industry average. However, TNS’s average commission rate has been negatively affected by the intense competition. If the declining trend in TNS’s commission rate persists. The management team may face some challenges on maintaining its profitability in the coming years. As of December 2014, shareholders’ equity stood at Bt3.3 billion. The company ended 2014 with a net capital ratio (NCR) of 65%, compared with the regulatory requirement of 7%.
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