KEY RATING DRIVERS
Standalone Profile Underpins Ratings: The ratings of FSS reflect an established retail franchise in Thailand's competitive securities brokerage industry, as well as a high reliance on brokerage income and execution risk as it carries out its revenue diversification strategy. The ratings also take into consideration FSS's adequate capitalisation and liquidity coverage that helps to cushion against unexpected risks.
Equity Market-Dependent Business: FSS is consistently among the five largest securities brokerage firms in Thailand by market trading volume, including a market share of 5.4% as of 9M22. However, its revenue mix is concentrated, with brokerage commissions 80% of revenue in 1H22, against the sector average of 55%. This leaves its business performance dependent on variable equity-market trading conditions.
Efforts to increase non-brokerage revenue, such as recurring wealth management fees, should help strengthen the business profile, but such income streams remain small relative to the overall business.
Volatile Earnings: Fitch expects that FSS's earnings will remain volatile because they are dependent on market-driven brokerage commissions. FSS's annualised operating profit/average equity decreased to 9.4% in 9M22, from 14.6% in 2021, in line with softening performance across the industry as average daily market turnover declined by 13.5% year-on-year (yoy). Earnings have been even more volatile in the past due mainly to fluctuating retail brokerage commission revenue.
Modest Leverage: Fitch expects FSS to maintain moderate leverage, supported by flexible dividend payouts, which should provide a cushion against potential market volatility. FSS's net adjusted leverage has remained in a range of around 1.9x-2.7x since 2017. Modest leverage and adequate liquidity coverage help to limit FSS's debt repayment risk in times of weak market performance and earnings pressure.
Adequate Liquidity Management: FSS is dependent on wholesale funding. Nonetheless, its liquidity profile reflects a low level of debt and adequate liquid asset holdings, which provide a buffer against potential stresses on earnings and market liquidity.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
There could be downside to the ratings if FSS's financial position deteriorates significantly, for example if the company's capital buffers weaken and net adjusted leverage rises to above 5x, with diminished earnings prospects that inhibit internal capital generation on a sustained basis. Such a development could indicate a prolonged decline in the company's business profile and competitiveness, which would also be negative for the credit profile. Any adverse shifts in the company's business strategy or risk appetite could also prompt negative rating action if significant and prolonged.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch may take positive rating action in the event of sustained improvement in the company's business profile, such as a more diverse business mix with a higher recurring income component that significantly enhances operating profitability. In particular, operating profit/average equity maintained above 10% over the medium term, generated through a balanced and sustainable business mix, would be positive for the credit profile. This is provided that FSS maintains sound capital and liquidity buffers commensurate with a higher rating.
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