Bangkok--16 Dec--Fitch Ratings
Fitch Ratings (Thailand) has affirmed Kiatnakin Bank Public Company Limited (KK) at National Long-Term 'BBB+(tha)' with Positive Outlook and Phatra Securities Public Company Limited (Phatra) at National Long-Term 'A-(tha)' with Stable Outlook. Their National Short-Term ratings have been affirmed at 'F2(tha)'.
The rating action follows the recent announcement of the merger plan between KK and Phatra Capital Public Company Limited (Phatra Capital) which holds a 99.7% stake in Phatra.
KK's Positive Outlook reflects Fitch's expectation that the bank would continue to improve its asset quality and profitability, as well as maintaining its strong capital ratio. Potential benefits from the merger, if successful, are another positive factor incorporated in the Outlook. An upgrade of KK's National Long-Term rating will depend on the execution of merged entity's business strategy and synergies realised from the merger. The merger is expected to be completed in Q312.
Fitch expects KK to leverage Phatra's expertise in investment banking and securities in Thailand. This should support KK's expansion in wholesales banking, allowing a gradual shift away from its traditional auto hire purchase, SMEs and residential project loans. The merger is based on a non-cash share swap, and therefore will not increase leverage at KK. In addition, KK's profitability should improve with the consolidation of Phatra Capital's results in 2012-13.
Fitch notes that synergies from the merger may take a longer time to realise due to integration risk and implementation of risk management policy. The agency notes that an effective risk management policy should help provide a growth platform for KK without compromising its credit quality and funding profile.
The ratings of Phatra reflect Fitch's expectations that it will maintain its business model and financial position after the merger. Despite the change in ownership at the holding level, Phatra's core business should not be affected by the merger. Phatra should continue to rely mainly on equity funding, although to support future business expansion, Fitch believes Phatra may increase leverage moderately. Nevertheless, Phatra's net capital ratio should range from 40%-60%, well above the minimum regulatory requirement of 7% and adequate for its risk profile.
Greater diversification of revenue and sustainable improvement in profitability and market position may lead to a positive rating action on Phatra. However, a substantial decline in the capital and liquidity position - as well as deteriorating profitability due to competition and a significant increase in leverage - may result in a negative rating action. Also, significant diversification into riskier areas such as proprietary trading and derivatives could increase Phatra's risk profile, undermining its ratings.
KK was established as a finance company in 1971 and became a commercial bank in October 2005, with total assets of THB184.9bn at end-September 2011. Phatra is Thailand's leading securities firm with a strong franchise in investment banking and equity research.