TRIS Rating Co., Ltd. has affirmed the company rating of Kiatnakin Bank PLC (KK) and the ratings of KK’s current senior debentures at “A-” with “stable” outlook. The ratings reflect the bank’s experienced management team, acceptable risk management and the consistent profitability. The solid growth in assets reflects the strategy to focus on hire purchase lending to replace its fading distressed asset management business. KK’s adequate cushion of capital should enable it to absorb risks from rises in non-performing assets. The bank has continued to improve asset quality as seen in the reduction in non-performing loans (NPL) from 12.5% of total loans in 2007 to 9.4% in September 2008. Also, the bank has lower exposure to residential project loans, which are riskiest assets. However, the ratings are constrained by its limited franchise value which will reduce its competitiveness in mobilizing cheap funds from the public. As it is typical for a small bank model, KK’s asset structure is not diversified and will limit its competitiveness in the long term. In addition, vulnerability to the downside risks from an economic downturn and intense competition among small banks might limit KK’s business growth and profitability in the future.
The “stable” outlook reflects the expectation that KK will be able to sustain profitability amid the financial market turmoil. KK faces less pressure compared with more complex financial institutions given global economic slowdown deepens. The rating outlook also reflects the bank’s ability to maintain sufficient capital funds to support the risk of asset devaluation due to economic instability. However, if asset quality deteriorates significantly, it will negatively impact the bank’s ratings.
TRIS Rating reported that as of September 2008, KK’s total loans were Bt79,215 million, up by 19.6% from Bt66,255 million as of December 2007. KK posted strong growth in hire purchase lending by 32% to Bt55,747 million as of September 2008 from Bt42,794 million as of December 2007, while residential project lending declined by 2%. Of the total loans, hire purchase lending accounts for 70%, up from 65% of total loans as of December 2007. This growth is in line with KK’s strategy to replace the distressed assets and foreclosed property portfolio which will wind down over the next 3-8 years. Residential project loans, the loans with the highest risk, account for 21% of total loans, or 16% of total assets as of September 2008, down from 26% of total loans and 19% of total assets as of December 2007. The bank’s three main businesses (investments in distressed assets, hire purchase loans, and residential project loans) have enabled KK to generate income and sustain high yields.
The ratio of KK’s classified loans (sub-standard, doubtful and doubtful loss) to total loans improved tremendously from 14.5% as of December 2006 to 12.5% as of December 2007, and to 9.4% as of September 2008. This is above the industry average of 7.6% for the 12 universal banks. KK’s asset quality has been adversely impacted by residential project loans. Classified loans from residential projects accounted for 71% of total classified loans (Bt5.3 billion out of the total Bt7.4 billion as of September 2008), and was 37% of total residential project loans as of September 2008. As KK’s business model is to invest in financial claims or loans purchased from the Financial Sector Restructuring Autority (FRA) and from Legal Execution Department (LED), non-performing asset (NPA) (classified loans more than three months pass due, and the outstanding amount of troubled debt being restructured and foreclosed property) was 14.2% of total assets, which was higher than an average of 12.9% for the 12 Thai universal banks.
TRIS Rating said, KK’s ratio of allowance for loan losses to the Bank of Thailand’s (BOT) minimum requirement was 111%, far lower than the industry average of 140% for the 12 universal banks as of September 2008. However, KK plans to set aside additional loan loss provision to keep the ratio in line with the industry average, which will affect its net income in the fourth quarter of 2008. KK had a strong capital fund, as shown by its BIS ratio of 15.34% at the end of September 2008. As KK engages in high risk-high return lending, especially residential project loans, maintaining strong capital fund and allowance for doubtful accounts is crucial to absorb unexpected losses from future downside risks. — End