Fitch has also affirmed the National Long-Term Ratings of two of the banks' subsidiaries – Kasikorn Securities Public Company Limited and SCB Securities Company Limited– at 'AA(tha)'. The Outlooks are Stable.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
The IDRs, National Ratings, and ratings on the senior debt of BBL, KBank, and SCB are driven by their Viability Ratings (VR). The IDRs, National Ratings, and senior debt of KTB are driven by the Support Rating Floor, which exceeds the bank's VR, as Fitch believes there a high probability of sovereign support for KTB if required.
The National Ratings of Kasikorn Securities and SCB Securities are driven by their status as strategically important subsidiaries of their respective parents KBank and SCB. This is due to their key roles in their parent banks' universal banking strategy, their status as wholly owned subsidiaries, and high levels of management and operational integration.
VRS
The VRs of BBL, KBank, SCB and KTB reflect their strong domestic franchises and large client bases. Their standalone financial profiles, particularly profitability and asset quality, have been weakened by the downturn of the domestic economy and could remain under pressure given the persistent weaknesses in the operating environment. Nevertheless, Fitch still expects these four banks to maintain acceptable financial profiles compared with their respective similarly rated peers.
BBL's domestic franchise is particularly strong in large corporates and international banking. BBL's VR takes into account its conservative risk appetite, which Fitch expects to lead to a lower delinquency rate through the cycle compared with its peers, and a stronger buffer (in terms of loan-loss reserve). Moreover, the VR also reflects BBL's healthy capital position, with ratios that are consistently among the highest in the Thai banking sector.
KBank's solid domestic franchise stems from a particular strength in the SME segment, but it has a sound overall credit profile. Fitch believes KBank's profitability and asset quality could be more affected by a persistently weak operating environment due to its larger exposure to SME segment (42% of loans at end-2016); however, Fitch expects KBank's maintenance of adequate buffers, in term of capital, reserve coverage and earnings, to mitigate the risks. As a result, KBank's overall financial strength should remain sound and comparable with similarly rated peers.
SCB has an extensive universal banking franchise, with a particular strength in retail banking. The rating also takes into account SCB's strong performance track record as evidenced by consistent earnings generation, with relatively high net interest margins, good cost control, and diverse revenue sources. Fitch perceives SCB's risk appetite to have been slightly higher in the past compared to its large bank peers, with some concentration risks. However, Fitch believes SCB has maintained adequate buffer in term of reserve coverage and capital.
KTB's VR is two notches below those of the other large banks. This reflects its weaker standalone financials, including asset-quality metrics throughout the latest economic cycle due to a higher risk appetite. KTB's capitalisation is likely to lag its large domestic peers. While asset contraction in 2016 strengthened KTB's capital ratios, Fitch expects the growth in its capital ratios to decelerate in 2017 as the bank expands its assets. On balance, the agency expects little change in KTB's key ratios and estimates they will remain broadly in line with similarly rated peers, notwithstanding possible deterioration in asset quality and profitability.
SUPPORT RATING AND SUPPORT RATING FLOOR (SRF)
The Support Rating and SRF of the four banks are based on their systemic importance to the Thai financial system, as reflected by their significant deposit market share of over 14% each. KTB's SRF of 'BBB' is one notch higher than the other three banks, as it is not only systemically important but also strategically important to the government. KTB is the only majority state-owned commercial bank, with close operational and branding links to Thailand's Ministry of Finance.
SUBORDINATED DEBT
BBL, SCB, and KTB have issued legacy Tier 2 notes (non-Basel III compliant) that are rated one notch down from their Long-Term IDRs or National Long-Term Ratings. This reflects the subordination in the capital structure relative to senior unsecured debt, and is in line with Fitch's approach to rating such instruments.
KBank's Basel III Tier 2 subordinated Thai baht-denominated notes are rated one notch below its National Long-Term Rating to reflect their partial write-down feature and higher loss-severity risk relative to senior unsecured instruments arising from their subordinated status.
KTB's US dollar-denominated Basel III Tier 2 subordinated debt is rated one notch below the IDR. The use of the support-driven IDR as the anchor rather than the VR reflects Fitch's view that government support would flow to KTB to prevent non-viability. The one-notch differential reflects their subordination status, the presence of partial rather than full write-down feature, as well as the lack of going-concern loss-absorption features.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
The IDRs, National Ratings, and ratings on the senior debt of BBL, KBank, and SCB could be affected by any changes in their respective standalone profiles, as indicated by the VR.
The IDR, National Ratings, and senior debt of KTB would be affected by any changes in its Support Rating Floor, which in turn reflects Fitch's view on the sovereign's capacity and propensity to support on a timely basis.
The National Ratings of Kasikorn Securities and SCB Securities would be similarly affected by any changes in their parent's National Ratings. They could also be affected by any perceived changes in the propensity of KBank or SCB to support their respective subsidiaries – for example, if there were a large reduction in shareholding or a reversal of marketing and management linkages. However, Fitch does not expect any such changes in the medium term.
VRS
There is unlikely to be upside to the VRs for BBL, KBank, and SCB – the ratings are at the same level as the sovereign's Long-Term Foreign-Currency IDR (BBB+/Stable) and the banks have a substantial exposure to sovereign bonds. A downgrade of the sovereign's Long-Term Foreign-Currency IDR could result in a similar ratings action for the VRs of BBL, KBank and SCB.
KTB's VR could be upgraded if it shows a sustained improvement in key financial ratios, particularly in asset quality and capitalisation, and reduces current gaps with its three peers. However, this is unlikely to occur in the short term, given the recent deterioration in some of its key financial ratios, particularly asset-quality figures.
For all four banks, a significant and sustained deterioration (beyond Fitch's expectations) in asset quality or profitability without maintenance of adequate buffers in term of earnings, loan loss reserves and capitalisation could lead to a negative rating action on the VR. Also, further weakening in the operating environment that materially increases the potential downside risk could lead to a downgrade of the VR; however, this is not Fitch's base case scenario, which is that the environment will see more signs of stabilisation in the latter part of 2017.
SUPPORT RATING AND SUPPORT RATING FLOOR (SRF)
Any change in the ability of the authorities to provide support - such as through a downgrade of the sovereign Long-Term Foreign-Currency IDR - would most likely lead to a similar change in the SRF of KTB, and would also lead to a re-assessment of the SRFs of BBL, KBank, and SCB.
Any change in Fitch's view on the propensity of the state to provide support to systemically important banks would also lead to a change in the SRFs of all four banks. For example, this might be evident from legislation mandating new controls on the state's powers to provide equity to banks. However, Fitch does not expect any such changes in the medium term.
SUBORDINATED DEBT
The subordinated debts of all four banks would be affected by any changes in the anchor ratings of the respective instruments.
The rating actions are as follows:
BBL
Long-Term Foreign-Currency IDR affirmed at 'BBB+'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB-'
National Long-Term Rating affirmed at 'AA+(tha)'; Outlook Stable
National Short-Term Rating affirmed at 'F1+(tha)'
Senior unsecured USD3 billion global medium-term note programme affirmed at 'BBB+'
Long-term foreign-currency senior unsecured notes affirmed at 'BBB+'
Long-term foreign-currency subordinated debt affirmed at 'BBB'
National long-term subordinated debt affirmed at 'AA(tha)'
KBank
Long-Term Foreign-Currency IDR affirmed at 'BBB+'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB-'
National Long-Term Rating affirmed at 'AA+(tha)'; Outlook Stable
National Short-Term Rating affirmed at 'F1+(tha)'
Senior unsecured USD2.5 billion Euro medium-term note programme affirmed at 'BBB+'
Long-term foreign-currency senior unsecured debt affirmed at 'BBB+'
National long-term subordinated debt rating affirmed at 'AA(tha)'
SCB
Long-Term Foreign-Currency IDR affirmed at 'BBB+'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB-'
National long-term rating affirmed at 'AA+(tha)'; Outlook Stable
National short-term rating affirmed at 'F1+(tha)'
Senior unsecured USD3.5 billion medium-term note programme affirmed at 'BBB+'
Long-term foreign-currency senior unsecured debt affirmed at 'BBB+'
National rating on short-term senior unsecured debt programme affirmed at 'F1+(tha)'
National rating on long-term subordinated debt affirmed at 'AA(tha)'
KTB
Long-Term Foreign-Currency IDR affirmed at 'BBB'; Stable Outlook
Short-Term Foreign-Currency IDR affirmed at 'F3'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB'
National Long-Term Rating affirmed at 'AA+(tha)'; Stable Outlook
National Short-Term Rating affirmed at 'F1+(tha)'
Senior unsecured USD2.5 billion Euro medium-term note programme affirmed at 'BBB'
Senior unsecured notes affirmed at 'BBB'
Subordinated US dollar debentures affirmed at 'BBB-'
National rating on THB20 billion short-term debenture programme affirmed at 'F1+(tha)'
National subordinated debt rating affirmed at 'AA(tha)'
Kasikorn Securities
National Long-Term Rating affirmed at 'AA(tha)'; Stable Outlook
National Short-Term Rating affirmed at 'F1+(tha)'
SCB Securities
National Long-Term Rating affirmed at 'AA(tha)'; Stable Outlook
National Short-Term Rating affirmed at 'F1+(tha)'