Fitch affirms Kiatnakin, Phatra Securities

The rating action follows the recent announcement of the merger plan between KK and Phatra Capital, which holds a 99.7-per-cent stake in Phatra.
KK’s positive outlook reflects Fitch’s expectation that the bank will continue to improve its asset quality and profitability, as well as maintaining its strong capital ratio. Potential benefits from the merger, if successful, are another positive factor incorporated in the outlook. An upgrade of KK’s national long-term rating will depend on the execution of the merged entity’s business strategy and synergies realised from the merger. The merger is expected to be completed in the third quarter of next year.
Fitch said it expected KK to leverage Phatra’s expertise in investment banking and securities in Thailand. This should support KK’s expansion in wholesales banking, allowing a gradual shift away from its traditional automobile hire-purchase, lending to small and medium-sized enterprises, and residential-project loans. The merger is based on a non-cash share swap, and therefore will not increase leverage at KK. In addition, KK’s profitability should improve with the consolidation of Phatra Capital’s results in 2012-13, the rating agency said.
Fitch noted that synergies from the merger might take some time to realise because of integration risk and implementation of risk-management policies. The agency noted that an effective risk-management policy should help provide a growth platform for KK without compromising its credit quality and funding profile.
The ratings of Phatra reflect Fitch’s expectations that it will maintain its business model and financial position after the merger. Despite the change in ownership at the holding level, Phatra’s core business should not be affected by the merger, Fitch said.

LEVERAGE
Phatra should continue to rely mainly on equity funding, although to support future business expansion, Fitch believes Phatra may increase leverage moderately. Nevertheless, Phatra’s net capital ratio should range from 40-60 per cent, well above the minimum regulatory requirement |of 7 per cent and adequate for its risk profile.
Greater diversification of revenue and sustainable improvement in profitability and market position may lead to a positive rating action on Phatra, Fitch said. However, a substantial decline in the capital and liquidity position – as well as deteriorating profitability due to competition and a significant increase in leverage – may result in a negative rating action. Also, significant diversification into riskier areas such as proprietary trading and derivatives could increase Phatra’s risk profile, undermining its ratings.
KK was established as a finance company in 1971 and became a commercial bank in October 2005, with total assets of Bt184.9 billion at the end of September this year.
Phatra is Thailand’s leading securities firm, with a strong franchise in investment banking and equity research.