Primary Credit Analyst:
YuHan Lan, Taipei (8862) 8722-5810; yuhan.lan@taiwanratings.com.tw
Secondary Contact:
Serene Y Hsieh, CPA, FRM, Taipei (8862) 8722-5820; serene.hsieh@taiwanratings.com.tw
Table Of Contents
Major Rating Factors
Rationale
Outlook
Major Rating Factors
Strengths:
•
Implicit support from its parent CDFHC group.
•
Better business diversification than domestic peers'.
•
Strong capitalization relative to its risk profile with good financial flexibility.
Counterparty Credit Rating
BBB/Stable/A-2
Greater China Regional Scale cnA/--/cnA-2
Taiwan National Scale twAA-/Stable/twA-1+
Weaknesses:
•
The sensitivity of its market risk exposure to volatile stock market conditions.
•
High reliance on wholesale funding sources.
Rationale
The ratings on KGI Securities Co. Ltd. reflect the company's strong capitalization relative to its risk profile and better
business diversification than domestic peers', with good presence in institutional business and overseas markets. In
addition, the ratings also reflect the likely implicit support from the China Development Financial Holding Corp.
(CDFHC) group. Counterbalancing factors include KGI Securities' high reliance on wholesale funding sources, the
higher market risk nature of its securities holdings, and the inherited volatility of its earnings profile.
We believe KGI Securities can expect a level of implicit support from the CDFHC group due to its "core" entity role
within the group. KGI Securities is the second largest securities firm in Taiwan by market size, with about 9% share of
domestic stock brokerage business. The company acts as the securities product provider within the group's
bank-centric business strategy. KGI Securities is closely integrated with the group, particularly in the business
development and financial management. We estimate that KGI Securities will continue to be a significant part of the
CDFHC group, contributing about one-third of the group's total net worth and profits.
We assess KGI Securities' business and geographical diversification as better than the average of Taiwan securities
firms. The company continues to develop a more balanced business mix with less reliance on the volatile performance
of Taiwan's stock market than its domestic peers, under the emerging benefits of deregulation. KGI Securities has good
presence on both institutional and retail brokerage business, which enables it to generate good fee margins with
growing wealth management business. The firm is also a lead player in underwriting business, benefiting from the
CDFHC group's resources in direct investment and corporate banking. In addition, the company's revenue
contribution from overseas markets is higher than the average of the local peers', achieved via its regional network in
Hong Kong and South East Asia. Revenue contribution from regional business generally ranges between 15%-25%.
We view KGI Securities' capitalization as strong relative to its risk profile, and this continues to provide a good buffer
to potential financial volatility, although the company's capitalization has been lessening as a result of fast growth in its
investment portfolio and the capital upstream to its parent group in the second half of 2014. However, we believe that
the securities house's financial flexibility is enhanced by its parent as a listed company in Taiwan. Furthermore, KGI
Securities has secured a stable credit line and the utilization rate is quite low, which provides another buffer for its
financial flexibility.
KGI Securities' market risk exposure is sensitive to stock market volatility given the company's securities holdings for
proprietary trading and underwriting commitments. KGI Securities' investments in equities and corporate bonds
accounted for about 50% of its assets as of the end of June 2014. However, we believe KGI Securities' adequate risk
management and prudent risk control partly offset this weakness.
We believe the company will remain highly reliant on lower cost short-term wholesale funding sources, including bank
borrowings, and the issuance of commercial paper and repurchase agreements. We view these wholesale funding
sources as less stable than commercial bank retail funding, because wholesale sources are highly sensitive to market
volatility. Nonetheless, KGI Securities' low utilization of bank credit lines and the company's adequate liquidity
somewhat offset this uncertainty. In addition, we expect KGI Securities to have the ongoing support from the group's
adequate funding and liquidity.
Outlook
The stable outlook reflects our expectation that KGI Securities will continue to be fully integrated with the CDFHC
group and maintain its "core" status over the next 12 months. Consequently, the ratings and outlook on the company
will move in tandem with the group's credit profile. We expect the CDFHC group to gradually reduce its direct
investment with proceeds to be injected into the group's combined commercial banking unit from China Development
Industrial Bank and Cosmos Bank to support the enlarged banking arm's high growth strategy.
We could lower the rating on KGI Securities along with the ratings on the group if the combined commercial banking
unit or the CDFHC group pursues overly aggressive business expansion without sufficient capital plans that result in a
sharp decline of capitalization with a risk-adjusted capital ratio below 10%. In addition, overly aggressive business
expansion in China, which we view as having higher economic risk, may negatively affect our anchor assessment for
the core banking entity. We could also lower the rating if the integration process of the bank entity encounters material
obstacles, leading to a weaker business franchise and business diversification because of failures to establish stable
retail banking business with satisfactory quality. Besides, we may also lower the ratings if KGI Securities "core" entity
role diminishes. We believe the likelihood of an upgrade is remote over the next two years.
Related Criteria And Research
Related Criteria
•
Group Rating Methodology, Nov. 19, 2013
•
Rating Securities Companies, June 9, 2004
Related Research
Table 1
KGI Securities Co. Ltd. Profitability Ratios
--Year-ended Dec. 31--(Mil. NT$) 2014 2013 2012 2011 2010
Net interest income/operating revenues 17.5 14.1 14.1 16.8 15.7
Fee income/operating revenues 50.7 43.7 49.2 59.6 58.2
Market-sensitive income/operating revenues 13.3 22.6 15.4 3.3 14.3 Personnel expenses/operating revenues (%) 42.3 39.3 38.4 33.2 33.1 Noninterest expenses/operating revenues (%) 74.6 72.0 82.2 81.0 74.0 New loan loss provisions/operating revenues (%) 0.0 0.0 0.0 0.0 0.0 Operating income after loss provisions/operating revenues (%) 25.4 28.0 17.8 19.0 26.0 Pretax profit/operating revenues (%) 25.4 28.0 17.8 19.0 26.0
Tax/pretax profit (%) 17.5 7.9 18.9 18.0 21.8
Core earnings/operating revenues (%) 20.9 25.8 14.4 15.6 20.3 Core earnings/average adjusted net assets (%) 1.4 2.5 1.4 1.6 2.4 Noninterest expenses/average adjusted net assets (%) 4.9 6.9 8.0 8.4 8.8 Core earnings/average regulatory risk-weighted assets (%) N.M. N.M. N.M. N.M. N.M. Core earnings/average adjusted common equity (%) 5.1 7.7 4.0 5.6 9.1
Pretax profit/average common equity 5.9 13.0 4.3 5.9 10.0
NT$--New Taiwan dollar. N.M.--Not meaningful. Note: Data for 2014 are for the six months ending June 30 and are annualized. Table 2
KGI Securities Co. Ltd. Capital Ratios
--Year-ended Dec. 31--2014 2013 2012 2011 2010
Adjusted total equity/managed assets (%) 21.6 26.4 29.9 29.0 22.6 Common dividend payout ratio (%) 0.0 78.8 213.8 56.2 39.0 N/A--Not applicable. Note: Data for 2014 are for the six months ending June 30 and are annualized. Table 3
KGI Securities Co. Ltd. Summary Balance Sheet
--Year-ended Dec. 31--(Mil. NT$) 2014 2013 2012 2011 2010 Assets
Cash and money market instruments 38,701 37,109 18,851 26,283 28,392
Securities 146,326 118,905 61,152 85,823 97,287
Trading securities (marked to market) 142,192 115,021 57,891 81,653 92,601
Nontrading securities 4,134 3,884 3,262 4,169 4,686
Mortgage-backed securities included above 0 0 0 0 0
Loans to banks (net) N/A N/A N/A N/A N/A
Receivables (gross) 0 0 0 0 0
Loan loss reserves 0 0 0 0 0
Receivables (net) 0 0 0 0 0
Table 3
KGI Securities Co. Ltd. Summary Balance Sheet (cont.)
Equity interests/participations (nonfinancial) 0 0 0 0 0
Investments in unconsolidated subsidiaries (financial companies) 1,965 2,088 2,724 0 0
Intangibles (nonservicing) 8,635 8,096 8,209 9,002 9,374
Interest-only strips N/A N/A N/A N/A N/A
Fixed assets 6,248 6,209 3,583 3,860 4,229
Derivatives credit amount 0 0 0 0 0
Accrued receivables 83,019 67,760 21,151 22,735 40,347
All other assets 1,970 2,050 12,188 711 1,271
Total assets 286,863 242,217 127,858 148,414 180,899
Intangibles (nonservicing) 8,635 8,096 8,209 9,002 9,374
Less insurance statutory funds N/A N/A N/A N/A N/A
Adjusted assets 278,228 234,121 119,649 139,412 171,525
Liabilities
Total deposits 0 0 0 0 0
Noncore deposits 0 0 0 0 0
Core/customer deposits 0 0 0 0 0
Acceptances N/A N/A N/A N/A N/A
Repurchase agreements 59,115 41,331 20,978 30,600 33,131
Other borrowings 38,544 18,152 10,331 13,815 34,748
Other credit reserves N/A N/A N/A N/A N/A
Other liabilities 101,476 95,232 41,267 48,323 56,330
Total liabilities 214,375 167,527 79,720 97,333 130,115
Total equity 72,488 74,691 48,138 51,081 50,784
Limited life preferred and quasi equity N/A N/A N/A N/A N/A
Preferred stock and other capital N/A N/A N/A N/A N/A
Manditorily convertible securities N/A N/A N/A N/A N/A
Enhanced trust preferred N/A N/A N/A N/A N/A
Government-owned hybrids included in TAC without limit N/A N/A N/A N/A N/A
Minority interest-equity 6,010 6,064 10 3,059 3,168
Common shareholders' equity 66,478 68,627 48,129 48,022 47,617 Share capital and surplus 54,622 55,534 35,712 35,712 34,838
Revaluation reserve 35 524 (1,070) (916) 521
Retained profits 11,822 12,570 13,487 13,227 12,879
Other equity 0 0 0 0 (622)
Total liabilities and equity 286,863 242,217 127,858 148,414 180,899 NT$--New Taiwan dollar. N/A--Not applicable. Note: Data for 2014 are for the six months ending June 30 and are annualized. Table 4
KGI Securities Co. Ltd. Equity Reconciliation Table
--Year-ended Dec. 31--(Mil. NT$) 2014 2013 2012 2011 2010
Table 4
KGI Securities Co. Ltd. Equity Reconciliation Table (cont.)
Plus minority interest (equity) 6,010 6,064 10 3,059 3,168
Minus dividends (not yet distributed) - - - -
-Minus revaluation reserves (35) (524) 1,070 916 (521)
Minus nonservicing intangibles (8,635) (8,096) (8,209) (9,002) (9,374)
Minus interest-only strips (net) N/A N/A N/A N/A N/A
Minus tax loss carryforwards - - - -
-Minus postretirement benefit adjustments - - - -
-Minus cumulative effect of credit-spread related revaluation of liabilities N/A N/A N/A N/A N/A
Minus other adjustments - - - -
-Adjusted common equity 63,819 66,071 40,999 42,995 40,890
Plus admissible preferred and hybrids - - - -
-Total Adjusted Capital 63,819 66,071 40,999 42,995 40,890
Plus general reserves - - - -
-Plus unrealized gains - - - -
-Minus equity in unconsolidated subsidiaries (1,965) (2,088) (2,724) -
-Minus capital of insurance subsidiaries - - - -
-Minus adjustment for securitized assets - - - -
-Adjusted total equity 61,854 63,983 38,275 42,995 40,890
NT$--New Taiwan dollar. N/A--Not applicable. Note: Data for 2014 are for the six months ending June 30 and are annualized. Table 5
KGI Securities Co. Ltd. Profit And Loss
--Year-ended Dec.
31--(Mil. NT$) 2014* 2013 2012 2011 2010
Net interest income 1,372 2,250 1,640 2,511 2,786
Interest income 1,645 2,709 1,930 2,899 3,089
Interest expense 273 459 289 389 304
Operating noninterest income 6,470 13,689 9,964 12,436 15,003
Fees and commissions 3,975 6,959 5,707 8,911 10,358
Net brokerage commissions 3,621 6,327 5,496 8,422 9,841
Trading gains 645 3,065 1,471 695 1,646
Other market-sensitive income 398 540 317 (201) 893
Net insurance income N/A N/A N/A N/A N/A
Equity in earnings of unconsolidated subsidiaries N/A N/A N/A N/A N/A
Other noninterest income 1,453 3,125 2,469 3,031 2,106
Operating revenues 7,843 15,940 11,605 14,947 17,789
Noninterest expenses 5,853 11,470 9,541 12,109 13,169
Personnel expenses 3,320 6,272 4,460 4,959 5,883
Other general and administrative expense 1,861 3,957 3,903 5,605 5,699
Preprovision operating income 1,990 4,470 2,063 2,837 4,619
Credit loss provisions (net new) - - - -
Table 5
KGI Securities Co. Ltd. Profit And Loss (cont.)
Nonrecurring/special income - - - -
-Nonrecurring/special expense N/A N/A N/A N/A N/A
Amortization of intangibles N/A N/A N/A N/A N/A
Impairment of intangibles N/A N/A N/A N/A N/A
Pretax profit 1,990 4,470 2,063 2,837 4,619
Tax expense/credit 348 352 389 511 1,007
Net income (before minority interest) 1,642 4,118 1,674 2,326 3,612 Minority interest in consolidated subsidiaries N/A N/A N/A N/A N/A Net income before extraordinaries 1,642 4,118 1,674 2,326 3,612 Net income after extraordinaries 1,642 4,118 1,674 2,326 3,612 NT$--New Taiwan dollar. N/A--Not applicable. Note: Data for 2014 are for the six months ending June 30 and are annualized. Table 6
KGI Securities Co. Ltd. Core Earnings Reconciliation Table
--Year-ended Dec.
31--(Mil. NT$) 2Q14 2013 2012 2011 2010
Net income (before minority interest) 1,642 4,118 1,674 2,326 3,612
Minus nonrecurring/special income 0 0 0 0 0
Plus nonrecurring/special expense N/A N/A N/A N/A N/A
Plus or minus tax impact of adjustments 0 0 0 0 0
Plus amortization/impairment of goodwill/intangibles 0 0 0 0 0
Minus preferred dividends 0 0 0 0 0
Plus or minus other earnings adjustments 0 0 0 0 0
Core earnings 1,642 4,118 1,674 2,326 3,612
NT$--New Taiwan dollar. N/A--Not applicable. Note: Data for 2014 are for the six months ending June 30 and are annualized.
Ratings Detail (As Of November 26, 2014)
KGI Securities Co. Ltd.
Counterparty Credit Rating BBB/Stable/A-2
Greater China Regional Scale cnA/--/cnA-2
Taiwan National Scale twAA-/Stable/twA-1+
Counterparty Credit Ratings History
04-Aug-2014 BBB/Stable/A-2
12-Feb-2014 BBB/Watch Neg/A-2
14-Apr-2013 BBB/Stable/A-2
04-Aug-2014 Greater China Regional Scale cnA/--/cnA-2
12-Feb-2014 cnA/Watch Neg/cnA-2
14-Apr-2013 cnA/--/cnA-2
04-Aug-2014 Taiwan National Scale twAA-/Stable/twA-1+
12-Feb-2014 twAA-/Watch Neg/twA-1+
22-Jan-2013 twAA-/Stable/twA-1+
Sovereign Rating
Ratings Detail (As Of November 26, 2014) (cont.)
Greater China Regional Scale cnAAA/--/cnA-1+
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