Fitch Upgrades Bank of Ayudhya to A-/AAA(tha); Outlook Stable

Stocks and Financial Services Press Releases Tuesday January 28, 2014 14:38
Bangkok--28 Jan--Fitch Ratings

Fitch Ratings has upgraded Bank of Ayudhya Public Company Limited’s (BAY) Long-Term Issuer Default Rating (IDR) to ‘A-’ from ‘BBB’ and its National Long-Term Rating to ‘AAA(tha)’ from ‘AA-(tha)’. The Outlook is Stable. A full list of BAY’s ratings is provided at the end of this commentary. Fitch has removed the ratings from Rating Watch Positive (RWP), where they had been placed on 5 July 2013.

The agency has also assigned BAY’s upcoming issue of senior unsecured bonds of up to THB12bn National Long-Term ratings of ‘AAA(tha)’. The proceeds of the bonds, which mature in two and/or three years, will be used for refinancing and/ or general corporate purposes.

Key Rating Drivers

The upgrades of BAY’s IDRs and National Ratings reflect Fitch’s belief of an extremely high probability of extraordinary support from its new institutional shareholder, Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU, A/Stable), if needed. BTMU recently acquired a controlling stake of 72.01% in BAY, and its shareholding is expected to further increase to 76.44% once the integration of BAY with BTMU’s Bangkok branch is completed by the end of 2014.

BAY’s Long-Term IDR is one notch below BTMU’s Long-Term IDR. This is based on our assessment that BAY is of strategic importance to BTMU and its ultimate parent, Mitsubishi UFJ Financial Group (MUFG, A/Stable). The acquisition of BAY will support BTMU’s strategy of expansion in Southeast Asia. Among BTMU’s subsidiaries, BAY is the largest contributor of gross profit in Asia, and the second-largest contributor globally after US-based UnionBanCal Corporation (A/Stable).

BTMU has effective control of BAY’s board of directors and management through the appointment of the directors and key management, including the chief executive officer. BTMU has a 10-year grace period after acquiring BAY to inject additional capital. After that period, BTMU could be restricted from purchasing new shares in BAY if its holding is above 49%. While this could result in dilution in the long-term, Fitch believes that the regulators are unlikely to prevent an injection of additional capital by BTMU if that is required in the event of financial distress at BAY.

The Stable Outlook on BAY’s Long-Term IDR is consistent with that of its parent.
The support rating of ‘1’ reflects Fitch’s expectation of an extremely high probability of extraordinary support from BTMU.
The Support Rating Floor is withdrawn since we believe that the institutional support is more likely to be called upon first, with sovereign support potentially as a back stop.
The senior notes are rated at the same level as BAY’s National Long-Term Rating of ‘AAA(tha)’ as they represent unsecured and unsubordinated obligations of the company.

The legacy Basel II subordinated debt are rated at ‘AA+(tha)’, one notch below BAY’s National Long-Term Rating of ‘AAA(tha)’ to take into account their subordination in the capital structure.

The short-term senior unsecured debentures program is consistent with BAY’s Short-Term National Rating of 'F1+(tha)', as the debentures represent unsecured and unsubordinated obligations of the bank.
Rating Sensitivities– IDR, Support Rating and National Ratings

An upgrade is unlikely given BAY’s IDR is currently rated at the Country Ceiling of ‘A-’, while its National Long-Term Rating is the highest on the national scale. A negative rating action on BTMU’s IDRs would lead to similar rating action on BAY’s IDR, Support Rating and National Long-Term Rating. A negative rating action could occur if there is a reduction in BTMU’s shareholding in or in its propensity to provide support to BAY.

A negative rating action on BAY’s National Ratings would have a similar rating impact on its senior notes and subordinated notes.

BAY is Thailand's fifth-largest commercial bank by assets, with around 7% share of total assets in the market at end-September 2013. However, after its integration with BTMU, Bangkok branch, its market share should increase to around 10%. BAY’s ultimate parent, MUFG, BTMU’s single parent, is the largest financial group in Japan by assets with the most extensive overseas network.

A full list of BAY’s rating actions follows:
  • Long-Term IDR upgraded to ‘A-’ from ‘BBB’; Outlook Stable
  • Short-Term IDR upgraded to ‘F2’ from ‘F3’
  • Support Rating upgraded to ‘1’ from ‘3’
  • Support Rating Floor withdrawn from ‘BB+’
  • National Long-Term Rating upgraded to ‘AAA(tha)’ from ‘AA-(tha)’; Outlook Stable
  • National Short-Term Rating affirmed at ‘F1+(tha)’
  • National long-term senior unsecured debt upgraded to ‘AAA(tha)’ from ‘AA-(tha)’
  • National short-term senior unsecured debt affirmed at ‘F1+(tha)’
  • Legacy Basel II subordinated debt upgraded to ‘AA+(tha)’ from ‘A+(tha)’
  • An upcoming issue of THB senior unsecured bonds assigned at ‘AAA(tha)’
The rating that is unaffected from this review is as follows: