TRIS Rating Co., Ltd. has affirmed the company rating of Krungthai Card PLC (KTC) and the ratings of KTC’s senior debentures at “BBB+” with “stable” outlook. 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 Krung Thai Bank PLC (KTB), which holds a 49.45% stake in KTC. However, the ratings are limited by intense competition, a lingering uncertainty surrounding the operating environment, and regulatory risk, which might affect future expansion, asset quality, and profitability.
The “stable” outlook is based on expectation that KTC will continue to receive both financial and business support from KTB. The outlook also reflects KTC’s current ability to access the capital market, fulfil its funding plan by securing more credit lines from other non-affiliated financial institutions, and continue to maintain a stringent credit policy. However, if financial performance significantly deviates from expectation, ratings could be under pressure.
TRIS Rating reported that KTC’s short-term liquidity is not a major concern during the next one to two years, unless it chooses to aggressively expand and needs a substantial amount of new funding from confidence-sensitive funding sources. KTC issued debentures totaling Bt18,200 million during May-December 2009. Part of the proceeds were used to repay its short-term bills of exchange (B/E). As of 31 March 2010, KTC’s funding came from both financial institutions and the debt market. The funding structure comprised almost 100% long-term financing (67% from debentures and 33% from long-term bank loans including syndicated loans). In addition, the company has unused credit lines and continuous cash flow streams from monthly loan repayments and instalment payments. KTC had a 36.1% utilization rate, defined as outstanding credit used as a percentage of total credit facilities granted by financial institutions, including KTB. As of March 2010, KTC did not utilize its credit facilities granted by KTB, which total Bt18,030 million.
In December 2009, KTC prepared the implementation of new accounting policy under International Accounting Standard (IAS) No. 39 (financial instruments; recognition and measurement). The company made full reserves for receivables greater than 90 days overdue. This is a change from the loss rate net of recovery methods. KTC also set aside additional reserves in consideration of the potential risk from a possible future economic downturn. As a result, KTC reported additional provisions resulting from accounting changes totalling Bt1,264 million in 2009. KTC expects to impose the additional reserve until meeting the requirement by IAS39, which is expected to be fully implemented in 2013. Additionally, the company implemented IAS12 (income taxes) for the first time. As a result, KTC recorded deferred taxes on the balance sheet. The company believes that the implementation of IAS12 will fully reflect its business and the obligations of income taxes payable or refundable in the future.
TRIS Rating said, KTC reported a net loss of Bt395 million in 2009, a substantial reversal from Bt617 million in net profit in 2008. The drop was mainly due to an increase in loan loss provisions and accounting policy changes. Part of the substantial net profit in 2008 was from the extra income received from VISA Inc. totaling Bt114 million. Provisions rose to Bt5,604 million in 2009 from Bt3,288 million in 2008 and Bt2,539 million in 2007. Return on average assets (ROAA) and return on average equity (ROAE) were -0.77% and -6.11% in 2009, compared with 1.3% and 9.8% in 2008. Very intense competition from large commercial banks and more stringent provisional policy will continue to pressure KTC’s profitability.
KTC continues to maintain a strong market position in credit cards. In terms of the number of cards issued, KTC had 12.2% market share as of December 2009, down slightly from 12.7% as of December 2008. To mitigate the possibility of deterioration in asset quality, KTC’s management team implemented several measures in 2008, including more stringent credit granting criteria and a tougher collection policy. KTC is also striving to increase the credit card spending of high-end customers.
As of December 2009, KTC had total loan receivables of Bt47,237 million, a 6.6% decrease from Bt50,587 million in 2008, due to the unfavourable operating environment and the more stringent credit policy implemented in 2009. Total receivables comprised credit card loans (76%), personal loans (22%), self-employed loans (1%), and circle loans (1%). KTC’s loan growth and quality are expected to gradually improve in 2010, as the economic slowdown bottomed out in 2009. However, political uncertainty will be a major challenge affecting growth and profitability.
The delinquency rate and net charge-off rate have kept increasing. As of December 2009, KTC’s overall delinquency rate (loans with more than 90 days past due) was 4.4%, up from 4.0% in December 2008. The increase in the delinquency rate was the result of a higher portion of overdue credit card receivables. In addition, the net charge-off rate increased from 5.5% in 2007 to 6.3% in 2008 and 10.4% in 2009 (7.9% excluding the accounting changes). KTC’s ratio of total allowances for doubtful accounts to total loans increased sharply in 2009 from 3.84% in 2007 to 6.84% in 2009. The ratio increased because some portions of fully reserved loans were still not written off. The increase in provision expense was the result of a deterioration in asset quality and more stringent provisioning criteria for the credit card, personal loan, and the self-employed loan portfolio, said TRIS Rating. -- End