TRIS Rating Co., Ltd. has assigned a rating of “A-” to the proposed issue of up to Bt1,610 million in senior debentures of Kiatnakin Bank PLC (KK). At the same time, TRIS Rating has affirmed the company rating of KK and the ratings of KK’s existing senior debentures at “A-”. The outlook remains “positive”. The ratings reflect the improvement in the bank’s business and financial profiles, experienced management team, acceptable risk management practices, good track record of improving asset quality, and strong level of capital funds. However, the ratings are constrained by its limited franchise value, unforeseen risks caused by the drop in the amount of insured deposits in accordance with the Deposits Protection Agency Act (DPA), and regulatory risk related to the issuance of bills of exchange (B/E). In addition, KK’s future business growth and profitability might be affected by the uncertainties surrounding the effects of the recent flooding in Thailand, the effects of the changing economic and political environments, and intense competition in both banking and securities businesses.
The “positive” outlook reflects the expectation that KK will be able to continue growing and sustain its profitability in the medium term. The outlook also reflects the bank’s ability to control asset quality and maintain a level of capital funds sufficient to absorb the downside risks due to the uncertainties in the economic and financial environments. Two major concerns remain: the possible effects from the heavy floods in Thailand, and the risk of an unstable retail deposit base caused by the full implementation of the DPA in August 2012. KK’s abilities to sustain its strengths and to secure stable sources of funds at reasonable prices have yet to be proved
TRIS Rating reported that KK was ranked 11th among all 15 Thai commercial banks in terms of total assets, with 1.6% market share in assets, 1.7% in loans, and 1.0% in deposits as of September 2011. KK’s core businesses in hire-purchase lending, residential project lending, and distressed asset management are well managed with high levels of management expertise and asset quality that remains under control. Supported by rising domestic vehicle sales and economic growth during the first nine months of 2011, KK’s loan portfolio expanded by 21% to Bt130 billion. Of the total, 74% was hire-purchase lending, 26% was residential project loans and others. As of September 2011, auto hire-purchase lending rose by 25% to Bt96 billion, compared with Bt77 billion in 2010. Loans for real estate and construction increased by 12%, from Bt21 billion in 2010, to Bt23 billion at the end of September 2011.
TRIS Rating said, as KK has a strategy to expand by focusing on good quality assets, the bank has imposed more stringent credit policy and underwriting criteria. KK’s non-performing loans (NPL) have consistently fallen. The ratio of NPL to total loans substantially improved from 12.3% of total loans in 2007 to 4.6% in 2010. At the end of September 2011, the NPL ratio continued to decline, sliding to 3.7%, which was better than the industry average of 4.0% for the 11 Thai universal banks in TRIS Rating’s database. However, the bank’s NPL ratio for loans to the real estate and construction sectors remained high at 14%, above the industry average of 8%. Non-performing assets (NPA; classified loans more than three months past due, plus outstanding troubled debt being restructured and foreclosed property) was 6.4% of total assets, better than the industry average of 7.0%. However, the bank’s ratio of allowance for loan losses to NPLs was 95%, below the industry average of 100%. KK has extended loans to sub-prime residential developers. Although these loans are high credit risk assets, KK maintains an adequate cushion of capital and allowances for doubtful accounts to absorb the risks from NPAs. The ratio of NPA to capital funds plus the allowance for doubtful accounts was 0.44 times, which was better than the industry average of 0.53 times.
KK was able to generate more income and sustain the high yield from its core businesses, while successfully controlling its operating costs. In 2010, KK reported a net profit of Bt2,840 million, up 27% from Bt2,229 million in 2009. Although the ratio of operating expenses to total income increased from 30% in 2009 to 38% in 2010, it remained lower than the industry average of 42%. KK’s return on average assets (ROAA) rose to 2.1% in 2010 from 1.8% in 2009, while the return on average equity (ROAE) also increased, rising to 14.6% from 12.7%. For the first nine months of 2011, KK reported net profits of Bt2,176 million, falling 7.4% year-on-year, and its non-annualized ROAA and ROAE were 1.3% and 10.0%, respectively. The falls were mainly caused by more provisions for loan losses and higher personnel expenses than in the first nine months of 2010.
In terms of liquidity and funding, KK is exposed to some level of liquidity risk, as the bank had a negative maturity gap for assets and liabilities with less than 12 months duration. Furthermore, KK has concentrated on wholesale funding, which tends to be a more volatile funding source. Nonetheless, KK has a strategy to increase the number of retail accounts to diversify its sources of funding. At the end of June 2011, the bank’s current and savings deposits (CASA) was 8% of total deposits, up from 1% in 2008.
KK has a strong capital base as illustrated by a capital adequacy ratio of 15.50% at the end of September 2011, up from 15.18% in 2010. As KK engages in high risk-high return lending, especially for residential project loans, maintaining a strong capital base and stringent allowances for doubtful accounts are crucial to absorb unexpected losses from future downside risks, said TRIS Rating. -- End