Bangkok--May 4--Fitch Ratings
Fitch Ratings (Thailand) has today affirmed the National Long- and Short-term ratings assigned to Kim Eng Securities (Thailand) Public Company Limited (“Kim Eng”) at ‘BBB+(tha)’ and ‘F2(tha)’ respectively with a Stable Outlook. The ratings reflect Kim Eng’s strong local retail franchise, solid operating performance and robust capital position, but also take into account its high dependence on volatile brokerage earnings. They also reflect operating and credit risks from its securities and underwriting businesses. The planned launch of its derivative business has been put on hold, although this may eventually require a significant capital allocation.
Kim Eng’s main source of income, securities broking, accounted for 92% of total revenue in 2004. An improvement in trading volumes led to an increase in brokerage revenues to THB2.9 billion in 2004 from THB2.7bn in 2003. As a result, net income improved to THB1bn in 2004 from THB923.1 million in 2003. Kim Eng also reported a strong ROAE of 26.7% and a strong ROAA of 12.3%, while its cost to income ratio has been stable at around 54%.
Brokerage income is dependent on the performance of the Thai stock market, particularly trading volumes, which are highly cyclical and volatile. The re-regulation of brokerage fees in 2001 and improved trading volumes have helped enhance margins, but liberalisation of brokerage commissions is still possible after 2006, which could increase pressure again in the medium term. Trading volumes and the market outlook have also deteriorated for 2005. While Kim Eng intends to diversify income sources by providing investment banking and advisory services, private fund management, margin loans and the introduction of derivative warrants, these markets are also highly competitive. Thus, income from fee-based services is still likely to be relatively small, though this should rise over the medium term.
The bulk of Kim Eng’s assets comprise securities business receivables and cash. Its non-performing loans or receivables (“NPLs”) fell to THB318.6m at end-2004 from THB321.8m at end-2003. Nearly all of its NPLs from margin lending were incurred during the financial crisis and are fully provisioned. New NPLs for the past three years have been negligible. Fitch thinks credit risks should generally be moderate, although risks from customers’ cash trading and its underwriting business may increase particularly during a falling market. While market risks also appear moderate, Kim Eng started proprietary trading in 2004, raising its risk profile, although trading limits and volumes so far appear small.
Kim Eng has primarily funded its operations from capital. Most of its liabilities are in the form of securities trading accounts payable. As at end-December 2004, its debt-to-equity ratio stood at 62.9%, or excluding securities trading accounts payable, only 32.9%.
Kim Eng’s equity increased from THB2.6bn at end-September 2003 to THB3.7bn at end-2003 after the November 2003 capital raising. Its equity rose further to THB4.1bn at end-2004 on the back of earnings growth. Kim Eng’s equity to asset ratio stood at 61.4% at end-2004, up from 36% at end-2003 mainly as a result of smaller outstanding securities receivables at end-2004. Fitch notes that while capital ratios can fluctuate significantly depending on trading volumes, capital positions appear robust.
Contact: Chaiyapat Paitoon; Vincent Milton, Bangkok +662 655 4762/4759; David Marshall, Hong Kong +852 2263 9963.
Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(tha)’ for National ratings in Thailand. Specific letter grades are not therefore internationally comparable. End.