KEY RATING DRIVERS
Phatra's ratings are based on its standalone financial strength, and reflect its sound domestic brokerage franchise for institutional and high-net-worth clients, and its strong investment banking presence. The ratings also take into account Phatra's recently rising debt level and market risks, which are expected to remain manageable, with no material increases expected in the medium-term.
The nature of Phatra's business means its performance will remain sensitive to market swings, although Fitch expects Phatra to remain among the stronger players in the local industry, supported by its well-established business expertise, strong client base, and its relatively diversified revenue streams. Since having been acquired by Kiatnakin Bank Public Company Limited (KK) in 2012, Phatra has utilised short-term loans from KK to finance business growth. Given their relationship, Fitch views the funding as relatively stable. However, any material increase in such funding could weaken Phatra's credit profile, although Fitch does not expect this to happen.
Phatra's balance sheet has also expanded significantly due to a higher volume of trading by clients and Phatra's own securities borrowing and lending activities. As a result, the equity/assets ratio fell to 18.5% at end-June 2013 (end-2012: 35.9%; end-2011: 53.4%). This rise in leverage is mitigated for now by hedging activities, which lead to a grossing up of exposures, and expectations that the trend will not continue.
Phatra's proprietary trading portfolio has expanded, but is expected to stabilize as management intends to maintain current investment limits. Nevertheless, Fitch will continue to monitor any structural changes to investment risk, appetite and volatility.
RATING SENSITIVITIES
Phatra's standalone ratings are among the highest of Fitch-rated securities firms in Thailand. Rating upside is limited unless Phatra can materially lower its risk profile and leverage, and sustain that through industry cycles.
Persistently higher leverage relative to industry peers, a substantial decline in liquidity (including through much higher use of short-term finance), or deteriorating profitability, could put downward pressure on the ratings. A significant and sustained rise in investment risk, appetite, and volatility would also constitute downside risk to Phatra's ratings.