Bangkok--12 Dec--Fitch Ratings
Fitch Ratings (Thailand) has affirmed Phatra Securities Public Company Limited's (Phatra) National Long-Term Rating at 'A-(tha)' with a Stable Outlook and its National Short-Term Rating at 'F2(tha)'. The ratings are based on Phatra's solid brokerage franchise for institutions and high-net-worth clients, its strong investment banking (IB) in Thailand and manageable debt levels. The ratings also reflect the company's adequate, albeit weakened, liquidity.
The ratings also take into account Phatra's rising risk profile as the company plans to further expand its trading and investment business. Its investment portfolio accounted for 63% of equity at end-Q312 (end-2011: 54%). The growing risk, however, should partly be mitigated by hedging strategies and by various control limits. Fitch will continue to monitor any structural changes to investment risk, appetite and volatility.
A sustainable material improvement in market position or capitalisation as well as greater revenue diversification without expanding into high-risk businesses could benefit Phatra's ratings. Conversely, a substantial decline in liquidity, deteriorating and more volatile profitability or a significant increase in leverage could put downward pressure on the ratings. Significant diversification into higher-risk areas such as proprietary trading without a proper hedging strategy could also be another negative rating trigger.
Phatra's performance should remain stronger than the industry's average given its established brokerage and IB franchise although its 9M12 net profit declined 10% yoy. Overall, downward pressure on brokerage commission rates should partly be offset by the company's quality service, revenue from IB and effective cost management. However, the nature of Phatra's business means its financial performance, including leverage level, will remain sensitive to market conditions.
Equity remains the major source of Phatra's funding. It also raises funds through the issuance of structured notes as a means to offer new financial products to clients. Phatra's net liquid capital ratio (NCR) fell to 33% at end-Q312 from 86% at end-2011 due to larger brokerage securities payables and a higher volume of structured notes; however, this was still higher than the 7% minimum regulatory requirement. The company's NCR recovered to about 50% in November 2012 following loan repayment by its parent. Phatra plans to keep its NCR at about 40%. Liquid assets, which are mainly cash and listed trading securities, remain adequate with a liquid assets/borrowings ratio of 155% at end-Q312.
Fitch expects Phatra to increase earnings retention to fund its business expansion. It plans a zero dividend payment over the next two to three years. The recent merger between Phatra Capital Public Company Limited (Phatra Capital) and Kiatnakin Bank Public Company Limited (KK) means the latter is likely to finance any new funding needs of Phatra Capital. Phatra's equity to assets ratio declined significantly to 32% at end-Q312 (end-2011: 53%), due to higher brokerage securities receivables. Nonetheless, the ratio remains consistent with its rating level.
Phatra intends to leverage on KK's larger clients and capital base, for cross-selling of products and services and to increase activity in debt markets, respectively. Nonetheless, these new business initiatives would take time to materialise.
Phatra has been operating in the securities industry since 1974. Following the group restructuring in 2010, Phatra Capital, a newly set-up holding company, was founded and took a 99.7% stake in Phatra. In September 2012, Phatra Capital merged with KK through a share swap. As a result, KK now holds a 99.9% stake in Phatra Capital and is the ultimate parent of Phatra.