The upgrade is based on Fitch's view that the company's earnings capacity has sustainably improved on an enhanced franchise and greater business diversity.
KEY RATING DRIVERS
KTBSTSEC's National Ratings reflect a small domestic franchise, with a market share in securities trading volume at slightly above 1%. Nevertheless, the company's brokerage market share has been broadly stable through market fluctuations. Furthermore, KTBSTSEC's management has successfully broadened the company's non-brokerage fee income sources, in Fitch's view. Non-brokerage revenue made up around 68% of total revenue in 1H21, up from 39% in 2017.
KTBSTSEC has benefited from strong market conditions in 2021, in a similar way to other securities firms. The company's financial performance in 1H21 improved significantly, with operating profit-to-average equity rising to 37.4% (from 18.6% in 2020). Fitch expects a decline in this metric over the next 12-18 months, but the company's medium-term earnings prospects should remain commensurate with our expectations for similarly rated peers in comparable operating environments.
The ratings also reflect the company's smaller capital base and higher leverage compared with Fitch-rated peers. Furthermore, Fitch perceives that KTBSTSEC remains more exposed to funding and liquidity risks relative to higher-rated peers because of the less-established funding stability and more limited history of capital-market access.
The National Short-Term Rating of 'B(tha)' for the company's subordinated debentures is derived from the implied National Long-Term Rating of 'BB(tha)', based on our standard ratings correspondence table for short-term and long-term ratings.
The implied National Long-Term Rating of the subordinated debentures of 'BB(tha)' is one notch below KTBSTSEC's National Long-Term Rating of 'BB+(tha)' to reflect the subordinated debentures' higher loss-severity risk relative to senior unsecured instruments. This arises from the debentures' subordinated status, as subordinated noteholders rank after senior creditors in the priority of claims.
Additional notching has not been applied due to the lack of going-concern loss-absorption and equity-conversion features. Fitch uses the Corporate Hybrids Treatment and Notching Criteria for this assessment, in line with our approach for other Thai securities firms.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A further rating upgrade appears unlikely in the near term, given the recent upgrade.
In the longer term, KTBSTSEC's ratings could be upgraded if the company demonstrates additional improvement in its financial performance, in line with a stronger company profile, while maintaining a consistent risk appetite. This should be evident in sustained market share gains and adequate revenue diversity supporting stronger and better-quality earnings, combined with enhanced capital and liquidity buffers.
The National Short-Term Rating of the subordinated debentures is sensitive to changes in KTBSTSEC's National Long-Term Rating, which is the anchor rating. However, an upgrade is only likely if KTBSTSEC's National Long-Term Rating is upgraded to 'BBB(tha)' or above, in line with Fitch's ratings correspondence table for Thai national ratings.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
We do not expect a rating downgrade in the near term, given the rating has recently been upgraded.
Nonetheless, a substantial reversal of KTBSTSEC's improving financial trends, such as a significant weakening in profitability that deviates from Fitch's expectations and industry trends, could put downward pressure on the ratings. Such deterioration could indicate a weaker business profile than Fitch expects, along with potentially increased challenges in the company's funding profile. A significant worsening in operating conditions or an increasingly competitive environment could also be negative for the ratings because of KTBSTSEC's small franchise.
A multi-notch downgrade of KTBSTSEC's National Long-Term Rating to the 'B(tha)' category would result in a downgrade of the subordinated debenture rating, although Fitch does not foresee such material deterioration in the near term.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings