KEY RATING DRIVERS
Shareholder Support-Driven Ratings: The National Long-Term Rating is driven by Fitch's expectation that KTX's major shareholder, Krung Thai Bank Public Company Limited (KTB, AAA(tha)/Stable), would provide extraordinary support to KTX, if needed.
Notching Reflects Partial Ownership: KTX is rated three notches below KTB on the national rating scale, reflecting KTB's shared 50% ownership of KTX with a significant minority shareholder. Meanwhile, local investment company, XSpring Capital PCL, owns slightly less than 50%. We believe the organisational structure could limit management integration and control between KTX and KTB relative to higher-rated bank-owned securities firms.
Ongoing Integration and Synergy: The ratings also reflect continued operational integration and synergy between KTX and KTB, which underpins KTB's propensity to support its affiliate, in our view. KTX plays a unique role in KTB's universal banking strategy as the only group affiliate operating in the securities sector. There is ongoing cooperation between the two entities; for example, KTB leverages KTX's equity industry expertise and platform to support its investment products, while KTX benefits from funding facilities and client referrals from KTB.
Meaningful Management Independence: There is meaningful management independence, as directors on the board are appointed from both major shareholders and KTX is not part of KTB's consolidated financial statements. This weakens the links between KTX and KTB and may lower the major shareholding bank's propensity to support the securities affiliate relative to competitors that are more closely held and controlled by their shareholding banks.
Shareholder Support Ability: We use KTB's government support-driven National Rating as the anchor rating for KTX. We believe government support would flow through to KTX via KTB, due to the reputational links between the two entities and KTX's contribution to the group's strategy. Furthermore, KTX's equity base is small relative to the balance sheet of the shareholding bank, at 0.8% of KTB's equity at end-June 2022, such that any required support would be immaterial for KTB.
Variable Performance: Profitability can vary due to equity market volatility. Stock market trading volume plunged by 10% yoy in 1H22, but KTX's operating profit/average equity remained resilient at 20.6% due to effective cost management during the period. We believe the company's earnings and liquidity buffers are acceptable against market volatility as well as impairment charges arising from fraud events, such as the one affecting the industry in late 2022.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
KTX's National Ratings are sensitive to KTB's local-currency credit profile, as indicated by its National Long-Term Rating. A downgrade of KTB's National Long-Term Rating would likely have a similar impact on KTX's National Ratings, while also taking into account relativities on Thailand's national rating scale.
We may also downgrade KTX's National Ratings if the securities firm's strategic importance to KTB were to diminish, thereby lowering the bank's propensity to provide extraordinary support. This may happen if KTB reduces its stake in and control over KTX, or if weakened business synergies and integration start to diminish the incentives for KTB to support its securities affiliate. In this scenario, we may also consider rating KTX based on its standalone credit profile, which could result in a multi-notch downgrade. Nevertheless, we do not expect such a change in the near term.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Any increase in KTB's propensity to support KTX would positively impact KTX's National Long-Term Rating. This may occur if KTB raises its stake in KTX to above 75%, combined with strengthening management control and operational linkages between the two.
There is no upside to the National Short-Term Rating, as it is already at the highest point on the scale.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
KTX's senior debt is rated at the same level as the company's National Ratings, as it represents the unsubordinated and unsecured obligations of the borrower.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
Any change in KTX's National Ratings would have a similar effect on the National Ratings of the senior unsecured notes.
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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
KTX's ratings are linked to the local-currency credit profile of KTB, as denoted by the shareholder bank's National Long-Term Rating.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings