TRIS Rating Co., Ltd. has assigned a “A-” rating to the proposed issue of up to Bt5,000 million in senior debentures due within 2012 of Krungthai Card PLC (KTC) and has affirmed the company and existing senior debenture ratings of KTC at “A-”. At the same time, TRIS Rating has placed KTC’s ratings on “CreditAlert” with “developing” implication. The ratings reflect KTC’s capable management team and efficient operating system, which help sustain its solid market position in the credit card business. The ratings also take into consideration the strong support from a major shareholder, Krung Thai Bank PLC (KTB), holding 49.45% stake in KTC as of 2 April 2009. However, these strengths are partially constrained by intense competition, an unfavorable operating environment, and regulatory risk, which might affect future expansion, asset quality and profitability.
The “developing” CreditAlert reflects the likelihood that the ratings may be changed in the near future from the results of KTC’s recapitalization plan. The CreditAlert will be resolved when KTC completes the recapitalization as planned. However, if the capital raising plan fails, the ratings may be lowered.
TRIS Rating reported that on 18 March 2009, KTC’s board of directors approved a recapitalization plan, raising paid-up capital from Bt2,578 million to Bt10,313 million through right offerings to the existing shareholders. As KTC’s major shareholder, KTB’s board of director, agreed on 30 March 2009 to exercise the right offering. Consequently, the resolution of KTB’s shareholder meeting on 17 April 2009 was to agree to inject new capital to KTC as proposed. The success in recapitalization will significantly strengthen KTC’s capital status to be sufficient to absorb downside risks during a sharp economic slowdown period. Ownership of KTB in KTC is expected to increase substantially from the current level because right offering price of Bt10 per share is far higher than current market price. Therefore, it is unlikely that other shareholders will buy new shares. In case that KTB is the only shareholder who participates in right offering, KTB ownership in KTC will increase to 79.65% after recapitalization, and new capital injection will be Bt3,825 million. However, success of the recapitalization is subject to KTC’s shareholder resolution, which will have the shareholder meeting on 30 April 2009. If the shareholder resolution disagrees with the fund raising plan, the ratings will be negatively impacted.
TRIS Rating said, KTC continues to maintain a strong market position in credit cards. In terms of the number of cards issued, KTC had 12.7% market share as of December 2008, a slight increase from 12.3% as of December 2007. However, changing business conditions have limited KTC’s loan portfolio growth and profitability. These conditions include tighter regulations to qualify credit cardholders, a minimum repayment requirement, an interest rate cap for personal loans, the unfavourable operating environment, lower consumer confidence, and stronger provisioning criteria. Maintaining good asset quality is a major challenge during economic slowdown. To mitigate deterioration in asset quality, KTC’s management team implemented several measures in 2008 including more stringent credit criteria and collection policy, and plans to increase the credit card spending from high-end customers.
As of December 2008, KTC had total loan receivables of Bt50,587 million, a 12.6% increase from Bt44,922 million in 2007. Total receivables comprised credit card loans (71%), personal loans (26%), self-employed loans (2%), and circle loans (1%). Though KTC reported net profits of Bt520 million, or flat compared with 2007, it was lower than expectation, due to an increase in loan loss provision to Bt3,288 million in 2008 from Bt2,539 million in 2007. KTC’s profitability ratio was relatively flat, as return on average assets (ROAA) and return on average equity (ROAE) were 1.1% and 8.6% in 2008, respectively, compared with 1.2% and 9.0% in 2007.
The delinquency rate has kept increasing. As of December 2008, KTC’s overall delinquency rate (loans with more than 90 days past due) was 4.2%, down from 4.3% in December 2007, but the net charge-off rate increased from 5.5% in 2007 to 6.3% in 2008. KTC’s ratio of total allowances for possible loan losses to total loans increased from 2.51% in 2006 to 3.84% in 2007 and 3.81% as of December 2008. The increase in provisional expenses was the result of deteriorating asset quality and more stringent in provisioning criteria for personal loan portfolio. Since the last quarter of 2007, provisioning for personal loans has based on 3-year historical data of actual losses plus future factors that reflect the forecasted economic environment, changed from 2% of outstanding loans with less than 180 day past due.
Because the loan portfolio expanded, leverage weakened. The equity to asset ratio dropped from 13.64% in 2006, to 12.96% in 2007, and fell further to 11.88% as of December 2008. The equity to total loan ratio also dropped from 14.17% in 2006 to 13.25% in 2007, and then sank to 12.19% as of December 2008. The debt to-equity ratio also rose from 5.94 times in 2006 to 6.33 times in 2007 and to 7.03 times in 2008.
TRIS Rating said, KTC’s financial flexibility and liquidity are considered adequate. As of December 2008, KTC’s funding came from both financial institutions and the debt market. The funding structure comprised 36% short-term borrowings, 32% long-term borrowings (including syndicated loans), and 32% debentures. KTC’s financial flexibility was strengthened when credit lines from KTB, its parent company, increased from Bt13.03 billion at the end of 2008 to currently Bt18.03 billion. As of 20 March 2009, the outstanding borrowings from KTB was Bt11.65 billion or 65% of KTB’s credit lines, up from Bt120 million or 0.9% as of September 2008. Due to global financial crisis, investors have more risk aversion that caused difficulty for KTC to roll-over its bills of exchange, KTC then relied more on funding source from KTB. -- End