TRIS Rating Co., Ltd. has assigned the company rating of KT ZMICO Securities Co., Ltd. (KTZ) at “BBB+” with “stable” outlook. The rating is based on the company’s experienced and capable management team, business and financial support from the major shareholder, Krungthai Bank PLC (KTB), and market position improvement in the securities brokerage business after merging securities brokerage business from ZMICO Securities PLC (ZMICO). However, these strengths are partially offset by intense competition in the brokerage business, inherent volatility of the Thai stock market, and market risk associated with the company’s proprietary trading. The rating also takes into account the uncertainty from regulatory risk regarding a full liberalization of brokerage fees in 2012. The ability of management to generate diverse sources of stable income and to leverage the benefit from KTB’s customer base has yet to be proved.
The “stable” outlook reflects TRIS Rating’s expectation that KTZ will continue to receive both financial and business support from KTB. The rating outlook is also based on the expectation that the company is able to leverage benefit from KTB’s network to enlarge potential customer base and to maintain the solid position in the securities brokerage business after the full brokerage fee liberalization is effective in 2012. In addition, KTZ is expected to be able to control the embedded risks arising from its investment portfolio, margin loans, and new products, and will be able to expand without substantially weakening its capital base or liquidity.
TRIS Rating reported that KTZ was originally incorporated as HSBC Securities (Thailand) Co., Ltd. by HSBC Investment Bank Asia Holdings Ltd. in 2000, to operate securities dealing and securities brokerage businesses. The company name was changed to “KTB Securities Co., Ltd.” (KTBS) after KTB acquired half of the total shares and became the major shareholder in September 2006. In September 2008, KTB entered an agreement with Seamico Securities PLC (ZMICO) to jointly operate the securities business. ZMICO initially acquired 48.64% (and now currently holds 49.54%) of the total shares from the existing shareholders. The company’s name was changed to KT ZMICO Securities Co., Ltd. in April 2009. KTZ later acquired the good margin loan accounts, almost all securities-related employees including key managers, client accounts, the derivative business license and other key fixed assets from ZMICO. These assets were worth around Bt1,300 million. The business started operating under the name KTZ in May 2009.
TRIS Rating said, KTZ provides brokerage services as its core business. The revenue contribution from brokerage fees was more than 90% of total revenue during 2005-2008. However, after being taken by ZMICO’s management team in 2009, KTZ has gradually diversified sources of income to other fee-based income since the management team has a good track record in securities underwriting transactions and financial advisory for small- to medium-sized companies. KTZ was able to reduce reliance on brokerage fee income after the merger. For the first half of 2010. KTZ reported total income of Bt570 million, of which 79% was generated from brokerage fees (Stock Exchange of Thailand -- SET and Thailand Future Exchange -- TFEX), 6% from other fee-based businesses, 3% from interest and dividend on securities investment, 9% from margin loans, and 3% from gains on trading in securities. Further strengthening the investment banking team will eventually benefit the company in the long run in terms of revenue diversification, which will reduce the over-dependence on brokerage income. Earnings will then be less vulnerable when brokerage commissions are fully liberalized in 2012.
TRIS Rating also said that after the acquisition, KTZ’s market share improved to 6.91% as of May 2009 and 7.49% as of June 2009, second place among brokerage firms and up from 1.29% for the first four months of 2009. In 2009, KTZ was ranked third amongst 35 brokerage houses, with the market share of 5.47%. The rank slightly moved down to the fourth place with the market share of 4.73% for the firstnine months of 2010. Profitability remains pressured by the intense competition among brokers and sliding brokerage fee. KTZ reported net profits of only Bt35 million for the first half of 2010. However, the company’s profitability is expected to improve in the second half of 2010, as supported by a sharp increase in average daily stock trading volume on the SET to Bt26,212 million during the first nine months of 2010, compared with Bt18,007 million in 2009. However, KTZ remains challenged to efficiently manage the number of excess staff, as a result of the acquisition. The ratio of operating expenses to total income surged to 82% for the first half of 2010 from 76% in 2009, which was above the industry average of 62%. In terms of leverage, despite a Bt300 million capital injection in April 2010, the ratio of total assets to equity increased from 2.08 times in 2009 to 2.13 times as of June 2010, which moved toward an industry average of 2.49 times. KTZ has sufficient bank credit lines, mainly from KTB, available to absorb its liquidity risk and to further expand its businesses as planned.
The company is expected to get strong support from KTB, which is required to maintain or improve competitiveness. However, the ability to fully leverage KTB’s network and customer base remains to be seen. KTZ’s management team has expanded the margin loans business with a revolving credit line provided by KTB. However, as a consolidated company under the KTB Group, KTB’s financial support to KTZ is limited by regulatory lending ceiling. Credit facilities provided to KTZ is subject to review and approval by KTB. KTZ has managed excess liquidity by becoming more active in proprietary trading. For the first nine months of 2010, the company’s trading account accounted for 23% of its total trading volume. This could generate extra income and enhance gross brokerage market share. However, the proprietary trading exposes the company to market risks. TRIS Rating expects the company to have a well-established risk management system to mitigate those exposures.
KT ZMICO Securities Co., Ltd. (KTZ)Company Rating: BBB+ Rating Outlook: Stable