Thai securities firms still face challenging sector dynamics despite their better than expected performance in 2020 because of strong capital market flows driven by Covid-19-related volatility, says Fitch Ratings.
Market fragmentation, tense competition and changing consumer behaviour driven by digital technology have continued to compress brokerage commission rates and long-term profitability, said Fitch.
Securities firms with strong franchises and diversified portfolios -- as well as disciplined risk appetite -- will remain better positioned to cope with these challenges, said the international credit rating agency.
The financial performance of Thai securities firms is likely to continue to be supported in 2021 by strong market trading activities and a robust pipeline of new equity offerings, said Fitch.
"Nonetheless, earnings prospects are susceptible to adverse changes in market sentiment and valuation -- likely to be caused by a roll-back of pandemic-related market support measures, an inability to contain the pandemic or sudden unfavourable changes of external macro variables," said Fitch.
Market volatility caused significant losses in trading and valuations in last year's first quarter.
These losses were reversed in later quarters, although this exposure to market risk highlights the long-term challenges facing Thai securities firms in diversifying away from brokerage income, said Fitch.
A shift in client segments warrants close monitoring as trading activities in the Thai stock market have gradually veered from local retail investors towards foreign institutional investors, said the rating agency.
"This has benefited brokerages with strong foreign partnerships and contributed to the decline in commission rates," said Fitch.
Fitch Ratings expects more competition, including from online brokerages, and an ongoing drop in brokers' commission rates in all segments.
"The secular decline in commission rates is forcing securities firms to diversify, such as into proprietary trading, financial advisory services and wealth management, with attendant execution risks," said Fitch.
"Some related business lines also remain dependent on underlying stock market conditions."
The agency expects brokerage commissions to decline to below 50% of total revenues over the short- to medium-term.
There are more than 30 active securities brokerage firms in Thailand, which leads to competition in all client segments.
The top five brokers had a combined market share of 35% in 2020, though there have been frequent shifts in market share.
There appears to be no near-term impetus, such as sector consolidation, to change this market structure significantly, said Fitch.