TRIS Rating Affirms Company Rating and Outlook of “BLS” at “AA-/Stable”

          TRIS Rating has affirmed the company rating of Bualuang Securities PLC (BLS) at “AA-” with “stable” outlook. BLS’s rating is enhanced from its stand-alone credit profile to reflect its status as a strategically important member of the BBL Group. The stand-alone rating is based on BLS’s solid franchise in brokerage services, the strength and diversity of its line of business and revenue base, its conservative style of management and the financial flexibility it has as a subsidiary of BBL. The rating also takes into consideration the potential benefits BLS may be able to realize by further leveraging the BBL Group’s nationwide network and business relationships. The rating is, however, constrained by the cyclical and volatile nature of the securities industry and the downward pressure on brokerage commission rates resulting from the full liberalization of brokerage fees in 2012. The “stable” outlook reflects the expectation that BLS will be able to utilize its franchise strength and support from the BBL Group to maintain its business and financial stability, despite more intense competition and pricing pressure after the full liberalization of brokerage fees. The outlook also takes into consideration BLS’s conservative policies on margin lending and proprietary trading, as well as its continuing efforts to diversify its sources of revenues and expand its retail customer base.
          BLS has a strong market position in securities brokerage, with 4%-5% market share, in terms of trading value, over the last five years. Its average commission rate has stayed above the industry average. Its share of industry-wide securities brokerage fees has grown steadily, from 3.5% in 2007 to 5.7% in the first half of 2014. BLS also has a leading market position in investment banking. Revenues from investment banking, which include underwriting fees and financial advisory fees, averaged over Bt300 million per year for the last three years. BLS’s revenues from investment banking are among the highest in the industry, ranking it among the top five brokers during the last five years.
          BLS has limited exposure to market risk. BLS, in accordance with its policy engages in proprietary trading only for arbitrage purposes and only to hedge its positions in its derivative warrant (DW) segment. BLS launched its first DW products in 2010 and is currently the market leader in this segment. BLS employs a dynamic delta hedging strategy to mitigate the price risk of the underlying assets for the DWs. TRIS Rating expects BLS will maintain an effective hedging and risk management system, which will prevent BLS from experiencing major losses from the DW products it offers. As for credit risk exposure, BLS’s margin loan portfolio stood at Bt1,029 million at the end of June 2014, representing 18% of its own equity and 2% of industry-wide margin lending. TRIS Rating expects BLS control the credit risk of the margin loans it has made by strictly enforcing margin calls and forced sales, and by maintaining its stringent criteria on collateral and underwriting.
          BLS can secure several benefits from being a subsidiary of BBL. BLS uses BBL’s branches as one of the main channels by which to expand its retail client base. Over 40% of BLS’s new brokerage accounts in the first half of 2014 came through referrals from BBL, up from one-fourth in 2012. BBL has long-standing relationships with many large business groups. Because of these relationships, BLS has an edge in servicing institutional brokerage clients through privileged corporate access, and an edge in securing investment banking transactions. These types of support give BLS an advantage over other securities firms which are not affiliated with a commercial bank. Moreover, BLS has received financial support from BBL in the form of credit facilities. BLS has been granted a large credit line from BBL. The total amount of available credit should be enough to fund BLS’s operations and cover any liquidity shortfalls.
          BBL Group has a strategy to strengthen its universal banking platform. As part of this strategy, BBL raised its shareholding in BLS from 56.34% to 99.75% in 2012. BBL aims to fully utilize BLS’s capital market expertise to provide the Group’s clients with end-to-end financial services for all their funding and investment needs. In addition, with the larger stake in BLS, BBL can more efficiently manage the capital employed within the Group and provide BLS with a larger amount of funding when needed.
          BLS’s net profit in 2013 jumped to Bt1,188 million, up 49% from Bt797 million in 2012. The increase was due mainly to high market trading volume and a rise in gains on trading revenues. BLS reported a net profit of Bt407 million for the first half of 2014. BLS’s profitability has been strong relative to its peers. Operating expenses remained under control, at 46% of net revenues in 2013 and 49% of net revenues for the first half of 2014 which are lower than the industry average.
          BLS’s equity base has been growing fast since becoming a fully-owned subsidiary of BBL, and is now one of the largest in the industry. BLS paid no dividend to its shareholders based on its performance in 2011 through 2013. In addition, BLS raised Bt1.6 billion in new equity capital in November 2013. BLS intended to use the new capital to expand its underwriting capacity, its margin loan portfolio, and its DW business. As of June 2014, its shareholders’ equity stood at Bt5.9 billion, compared with Bt1.9 billion as of December 2011. BLS ended 2013 with a net capital ratio (NCR) of 138%, which was higher than the regulatory requirement of 7%.

Bualuang Securities PLC (BLS)
Company Rating: AA-
Rating Outlook: Stable

TRIS Rating Affirms Company Rating and Outlook of “BLS” at “AA-/Stable”

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