TRIS Rating Assigns “A-” Rating to “KK’s” New Debentures with “Stable” Outlook

TRIS Rating Co., Ltd. has assigned the rating to Kiatnakin Bank PLC’s (KK) proposed issue of up to Bt4,000 million in senior debentures at “A-”. At the same time, TRIS Rating has affirmed the company rating and the ratings of KK’s existing senior debentures at “A-”. The outlook remains “stable”. The ratings reflect KK’s experienced management team in core businesses, acceptable risk management and practices, good track record in improving asset quality, increased diversification of retail funding base, and strong capital fund. However, the ratings are constrained by the bank’s limited franchise value and unforeseen risks of funding market change from the implementation of the Deposits Protection Act (DPA), which will be fully effective in August 2012. In addition, the downside risks from the uncertainty in the economic and political environments, and intense competition in both retail banking and securities businesses, might limit KK’s business growth and profitability. As it is a typical model for a small bank, KK’s asset and deposits structures are not well diversified, and will limit its competitiveness in the long term.

The “stable” outlook reflects the expectation that KK will be able to sustain business growth and profitability in the medium term. The outlook also reflects the bank’s ability to control asset quality and maintain sufficient capital funds to absorb downside risks due to uncertainty in the economic and business environment in the future. However, the rating outlook might be pressured by unforeseen risks of an unstable deposit base after the DPA implementation is fully effective.

TRIS Rating reported that KK’s core businesses in hire purchase, residential project lending and distressed asset management are well managed with high expertise and under controllable asset quality. As KK has a strategy to focus more on expanding good-quality assets, the bank has imposed a more stringent credit policy and underwriting criteria. As a result, the loan portfolio in 2009 grew by 7.8% to Bt87,117 million from Bt80,813 million as of December 2008, compared with a 22.0% growth in 2008. However, the loan portfolio grew by 7.9% to Bt94,145 million (unaudited) for the first half of 2010. Of the total, 71% was hire purchase lending, 15% was the residential project loans, and 14% was others.

Due mainly to write-offs since 2006 and attempts to control asset quality, KK’s non-performing loans (NPL) have decreased since 2007. The ratio of classified loans (sub-standard, doubtful and doubtful loss) to total loans improved tremendously, from 14.5% in 2006 to 12.4% in 2007, 8.7% in 2008 and 6.2% in 2009. The ratio improved to 5.9% at the end of March 2010. KK’s asset quality has been adversely impacted by residential project loans. Classified loans were 25.6% of total residential project loans at the end of March 2010, up from 22.8% at the end of December 2009. The ratio improved slightly to 23.1% at the end of June 2010 (unaudited).

TRIS Rating said, KK was able to generate better income and sustain high yield from its core businesses, while succeeding in controlling its operating cost. KK reported net profits that were up 19.4% to Bt2,231 million in 2009, from Bt1,871 million in 2008. KK continued to deliver outstanding performance in the first half of 2010 by reporting a 61.3% growth in net profits to Bt1,593 million (unaudited) from Bt987 million for the same period in 2009. The improvement was partly due to the Bt615 million gains from the sale of foreclosed assets in the first half of 2010, compared with only Bt164 million for the same period in 2009. The ratio of operating expenses to total income declined slightly to 32.8% in 2009 from 34% in 2008, far lower than the industry average of 45.4%. The ratio was 34.7% for the first half of 2010. KK’s return on average assets slightly declined to 1.84% in 2009 from 1.85% in 2008, but substantially improved to 2.49% (unaudited and annualized) for the first half of 2010.

On the funding side, KK’s strategy to increase the number of retail accounts with smaller amounts of deposit was reflected in the increase of the portion of savings deposits to 7.0% of total deposits as of December 2009 from 0.7% of total deposits as of December 2008. The ratio improved to 8.1% as of June 2010, mainly due to a decrease of 8.3% in term deposits from Bt70,334 million to Bt64,514 million. The drop in deposits was in place of the increase in short-term borrowings (mostly through bills of exchange) from Bt18,729 million to Bt23,407 million. KK had a strong capital fund, as shown by its BIS ratio of 16.85% at the end of June 2010 (unaudited). As KK engages in high risk-high return lending, especially residential project loans, maintaining a strong capital fund and allowance for doubtful accounts is crucial to absorb unexpected losses from future downside risks, said TRIS Rating. -- End

Company Rating: Affirmed at A- Issue Ratings: KK10NA: Bt966 million senior debentures due 2010 Affirmed at A- KK115A: Bt1,289 million senior debentures due 2011 Affirmed at A- KK119A: Bt1,450 million senior debentures due 2011 Affirmed at A- Up to Bt4,000 million senior debentures due within 2012 A- Rating Outlook: Stable Copyright 2010, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.