The “stable” outlook reflects the expectation that KTZ will receive the full support from KTB, that it will sustain its market share in brokerage services amid intensifying competition, and that it will maintain an adequate risk management system to oversee its margin lending and the hedging activities related to the issuance of DWs. In addition, TRIS Rating expects that KTZ will not expand in such a way that significantly increases its financial leverage.
The rating and/or outlook for KTZ could be revised upward if a sustainable improvement in profitability and capital position can be achieved. On the contrary, the downward pressure on the rating could develop if it continues to lose its market position in securities brokerage or if it further increases its financial leverage significantly.
Due to intense competition, KTZ’s market share in securities brokerage in terms of trading values has declined over the past few years, down from 4.14% in 2012 (ranked 10th) to 2.96% in 2014 (ranked 13th). However, KTZ’s average commission rate remained almost unchanged while the industry-wide average commission rate has significantly declined over the same period. As a result, KTZ’s share of industry-wide securities brokerage fees has not fallen much, down from 4.8% in 2012 to 4% in 2014. For derivatives brokerage, KTZ is one of the leading securities firm. Its revenue share in this segment has been around 5%-6% for the last few years.
KTZ has been using KTB’s branches to expand its retail client base. In 2014, KTZ’s new accounts that were referred from KTB comprised 37% of KTZ’s new accounts, up from less than 10% in 2010. Active accounts that were referred by KTB grew from 10% of all active accounts in 2011 to 21% in 2014. KTZ makes a concerted effort to communicate with KTB’s staff so that the bank’s staff can make business referrals and cross-sell KTZ’s securities-related products more effectively. In addition to the business support, KTB also provides KTZ with financial support. KTB has granted credit lines to KTZ so that KTZ can meet its liquidity needs and have enough capital to expand. Around 70% of KTZ’s credit facilities are provided by KTB. This support from KTB gives KTZ an advantage over other securities firms which are not affiliated with a commercial bank. Fee and service income rose to Bt152 million in 2014, up 260% from 2013, due in part to investment banking deals referred to KTZ by KTB. These examples highlight the close cooperation between KTB and KTZ, and the benefits from KTZ receives from the cooperative efforts.
KTZ is the first Thai securities firm to expand in Indochina. It holds a 30% stake in BCEL-KT Securities Co., Ltd. (BCEL-KT), one of the three securities companies in Lao People's Democratic Republic (Lao PDR). It also has an investment banking arm in Vietnam, formed through a strategic investment by Seamico Securities PLC (ZMICO) in Thanh Cong Securities Joint Stock Company (TCSC). ZMICO is KTZ’s other major shareholder, holding a 49.6% stake. KTZ’s regional network, plus its first-mover advantage, should give KTZ an edge over its local competitors for potential cross-border deals. Investment banking fees contributed 8% of total revenues in 2014, up from 2% in 2013. However, TRIS Rating expects investment banking fees, especially deals outside Thailand and deals referred by KTB, will comprise a large portion of KTZ’s revenue stream in the coming years.
KTZ became profitable after it acquired ZMICO’s securities operations in 2009. However, KTZ’s profit margin has been relatively thin due to its high operating costs. The ratio of operating expenses to net revenues was around 71% in 2014, higher than the industry average of 60% in 2014. Competition has intensified after the recent industry liberalization, driving down the brokerage commission rate across the industry. A thin profit margin might put KTZ at a competitive disadvantage, and squeeze its profitability.
Currently, KTZ has limited exposure to market risk. The company discontinued its speculative trading activities and has become more focused on arbitrage opportunities and on hedging its positions in derivative warrants (DWs). KTZ’s outstanding margin loan portfolio was Bt2.9 billion at the end of 2013, close to the level at the end of 2012. During 2014, KTZ’s margin loan portfolio expanded to Bt4.5 billion, a record high. The rise reflected industry growth in margin loans, but it also means KTZ has greater credit risk exposure. KTZ’s share of industry-wide margin lending remained stable at around 7%. However, with its thin capital base, the rise in margin loans has caused KTZ to become one of the most highly-leveraged securities firms. TRIS Rating expects KTZ to be cautious when extending more margin loans and when making any other decision that increases financial leverage.
In 2013, KTZ’s shareholders’ equity increased to Bt2.4 billion, from Bt2.1 billion at the end of December 2012. The rise was due to a successful rights offering during the year. The success of the rights offering shows that KTZ has the support from its major shareholders. The company’s net capital ratio (NCR) increased to 35% in 2013 and 2014, from 24% in 2012. However, KTZ’s aggressive leveraging of its equity capital base has given it one of the lowest NCRs in the industry.
KT Zmico Securities Co., Ltd. (KTZ)
Company Rating: BBB+
Rating Outlook: Stable