Fitch Ratings (Thailand) has affirmed Finansia Syrus Securities Public Company Limited's (FSS) National Long-Term Rating at 'BBB+(tha)'.

The Outlook is Stable. Fitch has also affirmed the National Short-Term Rating at 'F2(tha)'.

The affirmation follows the completion of a share swap between FSS and its newly set up holding company, Finansia X Public Company Limited (FSX) on 16 August 2023. FSX has acquired 99.74% of FSS under the share swap and will list on the Stock Exchange of Thailand on 23 August 2023. FSS will be delisted on the same day and will transfer its subsidiaries to FSX during September 2023.

Key Rating Drivers

Driven by Standalone Credit Profile: FSS's ratings are driven by its intrinsic credit profile, which incorporates the group's consolidated credit profile. Fitch adopts this rating approach as the securities firm will comprise the bulk of FSX's consolidated balance sheet and operating profit, and will be highly integrated with FSX in terms of strategic and balance-sheet management.

FSS's rating takes into account the group's established domestic retail brokerage franchise with acceptable leverage and liquidity buffers, balanced by a business model that depends on brokerage revenue and is prone to volatile profitability. The group also faces execution risk related to its diversification efforts.

Little Impact from Restructuring: The subsidiaries that will be transferred to FSX are mainly involved in advisory and underwriting. These are small and less significant contributors to earnings. The Stable Outlook reflects Fitch's expectation that the group restructuring will have little effect on the group's business model, risk profile or financial prospects.

Business Model Challenges: FSS's stable brokerage market share has ranged between 5%-6% for the past several years, ranking among the top-five brokers domestically. However, brokerage commission accounted for 65% of total revenue in 2022 (2021: 80%), above the sector average of 51%. The group aims to diversify its revenue, with a focus on wealth management. This saw retail brokerage contribute a slightly lower 64% of revenue in 1Q23, but Fitch expects the segment to remain as a core business, leading to volatile earnings through market cycles.

Weaker Environment Affects Earnings: Stock market sentiment has been less favourable, leading to a drop in trading volume; average daily turnover for 7M23 was down by 24% relative to 2022. This will weigh on revenue and profitability, with 1Q23 performance showing a plunge in annualised operating profit/average equity to 0.9%, from 9.4% in 2022. FSS's 2023 earnings will also be affected by non-recurring restructuring expenses, although Fitch expects the broker's competitive position and earnings generating capacity to remain intact in the medium term.

Acceptable Leverage and Liquidity: Fitch expects the company's conservative use of leverage, as evidenced by a moderate net adjusted leverage ratio of 2.2x in 1Q23 (2022: 2.9x), to buffer against any volatility in internal capital generation. Liquid assets/short-term funding was 4.5x in 1Q23; while the ratio may fluctuate with funding levels, Fitch expects liquidity coverage to remain adequate and commensurate with FSS's rating, particularly in light of the company's moderate gearing and mostly medium-tenor funding profile.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A significant weakening in the credit profiles of FSS or FSX relative to other entities rated on Fitch's Thai national rating scale may result in a downgrade. This could occur if considerably weaker financial buffers at FSS or FSX than Fitch expects see net adjusted leverage rise to above 5x for a sustained period, combined with greater risks to earnings prospects and internal capital generation.

Fitch may also reassess FSS's credit profile and take negative rating action upon a significantly adverse shift in the company's or group's business strategy or risk appetite that raises uncertainty about longer-term competitiveness, risk management and capital adequacy.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Rating upside could result from a sustained improvement in the company's business profile that strengthens earnings generation, with higher and more stable recurring income over the medium to long term. This may be indicated by average operating profit/average equity remaining above 10%, with more moderate volatility through a market cycle, combined with consistently sound capital and liquidity buffers.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

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