Fitch Affirms TBANK's and TCAP's Ratings; Outlook Negative

Stocks and Financial Services Press Releases Thursday June 27, 2013 11:46
Bangkok--27 Jun--Fitch Ratings

Fitch Ratings has affirmed Thailand-based Thanachart Bank Public Company Limited's (TBANK) Long-Term Issuer Default Rating (IDR) at 'BBB-' and Thanachart Capital Public Company Limited's (TCAP) National Long-Term Rating at 'A(tha)'. The Outlook is Negative. Fitch has also assigned a Support Rating Floor of 'No Floor' to TCAP. A full rating list breakdown is provided below.

TBANK's Key Rating Drivers - IDRs, Viability Rating (VR), and National Ratings

TBANK's IDRs, National Ratings and VR reflect its moderate domestic franchise, but leading market position in auto hire purchases. The ratings also take into account strong ordinary support, particularly in operation and risk management, from Bank of Nova Scotia (BNS; AA-/Stable). While some of TBANK's key financial measures are comparable with peers', capital and funding are weaker.

TBANK's funding profile has improved with a significant increase in its deposits base (up 60% yoy) which accounted for about 81% of total funding at end-2012, up from about 60% at end-2011. This was mainly driven by the conversion of bills of exchanges (BEs) into fixed deposits. As a result, its loans-to-deposits ratio fell to 108% at end-2012 (end-2011: 146%), before rising to 112% at end-March 2013. The Negative Outlook reflects Fitch's doubts over the sustainability of recent improvements at TBANK, as funding costs come under pressure from intense competition.

Fitch expects the bank to report significantly stronger performance in 2013, mainly driven by gain from the sale of its life assurance subsidiary. TBANK's impaired loans fell further to THB32.4bn or 4.2% of total loans at end-March 2013 (end-2011: THB38.9bn or 6.1%). Impaired loans ratio could fall further by end-2013, supported by further loan restructuring and a still favourable economic outlook. Special mention loans rose to THB33.2bn or 4.3% of total loans at end-March 2013 (end-2012: THB28.6bn or 3.8%), but Fitch does not expect the migration of special mention loans to impaired loans to increase in pace. Nevertheless, TBANK plans to set aside part of the proceeds from the sale of its life assurance subsidiary as extra provision. This will boost the loans loss coverage ratio to about 100%, closer to domestic peers.

TBANK's Fitch core capital of 8.7% and Tier 1 capital of 8.5% at end-2012 were weak compared with domestic and international peers. TBANK plans to maintain its Tier 1 capital ratio at about 9% - 10% over the medium term, which should still provide adequate buffer against downside risk. Fitch views the target as achievable given the bank's improved earnings momentum and slower loan growth targets.

Rating Sensitivities - TBANK's IDRs, VR, and National Ratings

Evidence that TBANK can maintain its overall credit profile, including no further deterioration in funding and sustaining asset quality and capital could result in a revision in Outlook to Stable. A material improvement in overall credit profile, particularly in capital and funding, or an increase in BNS shareholding to above 50% (currently 49%), could result in an upgrade. However, these events are unlikely to occur in the medium-term.

On the other hand, continued vulnerability to competition, as reflected in rising funding costs relative to competitors, higher reliance on short-term funding or further lagging of improvements relative to peers could lead to a downgrade. The rating may also be downgraded if BNS sells down its interest in TBANK to an entity with less capacity to support the bank's progress in its credit profile.

TBANK's Key Rating Drivers - Support Rating and Support Rating Floor

The '3' Support Rating and 'BB+' Support Rating Floor of TBANK reflect a moderate probability of support from the government, in case of need. This view is based on the bank's systemic importance to the domestic economy as a medium-sized bank with a reasonable market share of 7%-8%.

TBANK's Rating Sensitivities - Support Rating and Support Rating Floor

Any significant changes to the bank's systemic importance - typically indicated by market share in assets, loans and deposits - could affect the propensity of the government to support the bank, and hence its Support Rating and Support Rating Floor. A multiple-notch change to Thailand's IDRs could also affect the Support Rating and Support Rating Floor. However, Fitch believes these scenarios are unlikely to occur in the near term.

An increase in BNS shareholding to above 50% could also affect the bank's Support Rating, although this is unlikely in the medium term.
TCAP's Key Rating Drivers - National Ratings, Support Rating, and Support Rating Floor

TCAP's National Ratings are notched down from its core operating bank subsidiary, TBANK, to reflect its reliance on dividend payments (as opposed to loans, which are subject to a 5% cap) from TBANK and the presence of significant minority interests. The Negative Outlook reflects that of TBANK.

TCAP's Support Rating is based on expectations that sovereign support is possible, but cannot be relied upon, given the holding company structure and Fitch's expectations that support, if required, would be injected through the bank rather than the parent.

TCAP's Rating Sensitivities - National Ratings Support Rating, and Support Rating Floor

Any change in TBANK's ratings, could in turn affect TCAP's ratings. Significant increase in the double leverage ratio (end-March 2013: a moderate 105%) or weakening liquidity profile could result in wider notching from TBANK.

TBANK is the main operating entity within the Thanachart Group. TCAP currently holds 51% in TBANK, while BNS, Canada's third-largest bank, holds 49%. TBANK is the sixth largest bank in Thailand with a market share of 7.6% in assets at end-2012. TBANK has a solid franchise in the domestic auto hire purchase market.

The following ratings have been affirmed:
Long-Term IDR affirmed at 'BBB-'; Outlook Negative
Short-Term IDR affirmed at 'F3'
Support Rating Floor affirmed at 'BB+'
National Long-Term Rating affirmed at 'A+(tha)'; Outlook Negative
National Short-Term Rating affirmed at 'F1+(tha)'
Support Rating affirmed at '3'
Viability Rating affirmed at 'bbb-'
National Long-Term Rating affirmed at 'A(tha)' ; Outlook Negative
National Short-Term Rating affirmed at 'F1(tha)'
Support Rating affirmed at '5'
Support Rating Floor assigned at 'No Floor'

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