TRIS Rating has upgraded the company rating of KGI Securities (Thailand) PLC (KGI) to “A-” from “BBB+” with “stable” outlook. The upgraded rating reflects continual improvement in KGI’s business stability and diversification. In addition, the rating reflects the explicit business support KGI receives from its major shareholder in Taiwan, KGI Securities Co., Ltd. (KGI Group). These strengths helped KGI earn its reputation as a leading creator of innovative products and gave it a proven track record of posting gains on proprietary trading. The rating is, however, constrained by the cyclical and volatile nature of the securities industry and the downward pressure on commission rates from intensifying competition.
The “stable” outlook for KGI is based on the expectation that the company will maintain its market position in the brokerage segment and continue to earn a stable stream of non-brokerage income, despite the volatile conditions in the Thai stock market. In addition, KGI is expected to maintain an adequate risk management system to oversee its margin lending, proprietary trading, and other financial products.
The credit upsides are limited in the next 12-18 months after the upgrades. In contrast, downward pressure on the rating could develop if KGI’s profitability weakens over time and it cannot maintain its market position in the brokerage segment, and it cannot continue to earn a stable stream of income from its asset management subsidiary.
KGI has the strength and diversity of its operations plus the stable revenue streams from line of business other than the brokerage segment. Over the past five years, the fees earned from KGI’s securities brokerage and derivatives brokerage segments accounted for less than 50% of its total revenues, compared with an industry average of 67%. By reducing its reliance on securities brokerage fees, KGI put itself in a better position to handle the intensifying competition after brokerage fees were fully liberalized. KGI’s gains on trading in securities and derivatives, which represented 20%-30% of annual revenues over the last few years, were derived from a variety of activities, including bond dealing, private repos, derivative warrants (DWs), over-the-counter (OTC) derivatives, and investments in debt and equity securities for the company’s own account. KGI also has a recurring source of revenue from the fund management segment through its 99% ownership of ONE Asset Management Co., Ltd. (ONEAM). Revenues from fund management, which represented 19% of total revenues in 2015, are typically less volatile compared with other sources of revenue in the securities industry.
KGI is considered one of the industry leaders in terms of product innovation. It can utilize the financial engineering know-how and the experience of the KGI Group, which is drawn from the more-developed Taiwanese financial market. This connection secures KGI a competitive edge in product development in Thailand. By offering a wide range of products, KGI can attract different groups of investors as clients. KGI strives to stay ahead of its competitors by launching innovative financial products. KGI can then enjoy higher profit margins on the new products before competition crowds the market.
KGI’s market share, in terms of securities brokerage trading volume, for the first five months of 2016 was 3.58%, good for ninth place in the industry. KGI’s share decreased from 3.88% in 2015, and 4.28% in 2014. KGI’s brokerage client base is concentrated in Internet trading accounts, which charge low commission rates. KGI’s average commission rate, therefore, declined from 15 basis points in 2011 and 2012 to 10 basis points in 2015. The securities brokerage trading volume from KGI’s 20 largest clients increased from 33% of its total trading volume in 2014 to 40% in 2015, excluding proprietary trading. KGI still relies heavily on large accounts, which have higher bargaining power over the commission charges. This action makes KGI’s market share more vulnerable to competition than peers.
KGI’s proprietary trading activity exposes it to a certain level of market risk. However, KGI has a proven track record that the company has posted gains from proprietary trading every year for the past nine years. Its investment portfolio includes both fixed income and equity securities. A large proportion of KGI’s gains on trading are derived from selling financial products, such as DWs and other OTC derivatives. With the proper hedging strategies, the market risks from issuing these types of financial products are relatively low. As for its credit risk exposure, KGI’s margin loan portfolio as of March 2016 was Bt1.6 billion or 3% of total industry-wide margin lending and around 31% of the value of KGI’s equity.
KGI’s net profit in 2015 decreased to Bt588 million, compared with Bt762 million in 2014. The drop in net profit was mainly due to a drop in brokerage fees in line with the industry. At the end of 2015, the level of financial leverage, as measured by the ratio of adjusted assets to equity, fell to 1.5 times, compared with 1.7 times at the end of 2014. KGI’s net capital ratio (NCR) has been historically strong. It stood at 131% at the end of 2015, much higher than peers, and much higher than the regulatory minimum of 7%.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2016, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution, or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited, without the prior written permission of TRIS Rating Co., Ltd. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.