Fitch Upgrades KTB#s Short-Term IDR to #F2#; Affirms 4 Other Thai D-SIBs

Stocks and Financial Services Press Releases Wednesday May 2, 2018 16:18
Bangkok--2 May--Fitch Ratings

Fitch Ratings-Bangkok/Singapore-02 May 2018: Fitch Ratings has today upgraded Krung Thai Bank Public Company Limited's (KTB) Short-Term Issuer Default Rating (IDR) to 'F2' from 'F3', and affirmed its Long-Term IDR at 'BBB' and its National Long-Term Rating at 'AA+(tha)'. The Outlooks are Stable.

At the same time, Fitch has affirmed the ratings on four other Thai domestic systemically-important banks (D-SIBs) as follows:
  • The Long-Term IDRs on Bangkok Bank Public Company Limited (BBL), KASIKORNBANK Public Company Limited (KBank) and The Siam Commercial Bank Public Company Limited (SCB) at 'BBB+' and their National Long-Term Ratings at 'AA+(tha)'. The Outlooks are Stable.
  • Bank of Ayudhya Public Company Limited's (BAY) Long-Term IDR at 'A-' and its National Long-Term Rating at 'AAA(tha)'. The Outlooks are Stable.

Fitch has also affirmed the National Long-Term Ratings on the securities subsidiaries of two of the banks, namely 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).

Thailand's sovereign support drives the IDRs, National Ratings and ratings on senior debt of KTB. Fitch believes the state is highly likely to provide KTB extraordinary support, if required. Such sovereign support underpins the bank's Support Rating Floor of 'BBB', which exceeds its 'bbb-' VR. The upgrade of the Short-Term IDR reflects Fitch's re-assessment of KTB's capacity to meet short-term debt obligations. The agency no longer believes its capacity warrants a one-notch gap with the other Thai D-SIBs on the short-term scale given sustained improvement in KTB's key liquidity ratios and continuing evidence of ordinary support from the state to KTB.

Institutional support drives BAY's IDRs, National Ratings, and senior debt ratings. Fitch sees BAY as a strategically important subsidiary of MUFG Bank, Ltd. (A/Stable/a), which owns 76.9% of BAY. The linkages between BAY and MUFG Bank have increased since the integration of MUFG Bank's Bangkok branch into BAY in 2015, and we expect this to continue. BAY plays a key role in implementing the group's strategies in south-east Asia, and represents one of MUFG Bank's largest overseas investments.

The National Ratings on Kasikorn Securities and SCB Securities are driven by their strategic importance to their parents, KBank and SCB. The securities firms play a key role in their parent banks' universal banking strategy, are wholly owned subsidiaries, and exhibit high levels of management and operational integration with their parents.

VIABILITY RATINGS

The VRs of BBL, KBank, SCB, KTB and BAY take into consideration their strong domestic franchises and large client bases, which should allow them to outperform the industry over the medium term. Thai banks' profitability and asset quality had come under heightened pressure amid a weak operating environment in the period up to 2017. In particular, the core asset quality metric of the five banks is relatively weak compared with that of their global peers. However, Fitch expects pressure to recede over 2018 amid a more benign economic environment, particularly as the banks have already been tightening credit standards over the past few years.

BBL's domestic franchise is particularly strong among large corporates and in international banking. The bank's VR reflects not only its strong domestic franchise and solid capitalisation, but also its lower appetite for risk and more prudent funding and liquidity profile relative to domestic peers. Its funding and liquidity profile is characterised by a consistently low loans-to-deposits ratio and high levels of liquid assets. BBL has had weaker profitability compared with large domestic bank peers, but Fitch believes any further increases in NPLs would be manageable; the bank's high reserve coverage (end-2017: 160%) and solid capitalisation represent a strong buffer against any unexpected downturns.

KBank has a particular strength in the SME segment, while its strong deposit franchise mitigates funding and liquidity risks, and helps the bank maintain relatively low funding cost. Profitability and capitalisation are superior to that of most domestic peers, particularly considering its comparatively low risk appetite, and we expect them to become more stable in 2018 as the operating environment improves. KBank's improved buffers, including loan loss reserves and capitalisation, should help the bank withstand potential downside risks, including in asset quality, which like other banks in Thailand remains relatively weak, although it is showing signs of stabilisation.

SCB has an extensive universal-banking franchise, with a strength in retail banking. SCB's ratings also take into account the bank's financial performance relative to local peers; it has consistently generated earnings with reasonable net interest margins and good cost controls. Fitch perceives SCB's risk appetite to be higher than those of its large bank peers, with some concentration risks. However, SCB has reasonable risk controls to mitigate such risks, and the bank has been able to maintain satisfactory asset-quality metrics, although it has been under pressure in recent years. We also expect SCB to maintain adequate earnings, reserve coverage and capital, which together provide adequate buffers for the bank.

KTB's VR is two notches below those of BBL, KBank and SCB, reflecting KTB's weaker standalone financials - particularly its capitalisation. The 55% state-owned bank has a higher risk appetite than the other D-SIBs, explaining its asset-quality gaps with the other banks. KTB remains vulnerable to asset-quality issues, although Fitch believes these risks to be manageable as KTB appears to have been more cautious in underwriting over the past few years, while the operating environment is also improving. Fitch also expects the bank's earnings to continue underperforming some of the other D-SIBs. As a result, KTB's capitalisation level should still lag those of its domestic peers from weaker earnings retention.

BAY's VR is rated at one notch below those of BBL, KBank and SCB, reflecting its smaller domestic franchise; weaker profile relative to its larger domestic peers in other areas, including capitalisation and profitability; as well as higher risk appetite. BAY's business has grown faster than that of local peers and has been increasingly diversifying as it consolidates already strong market positions in consumer lending and among Japanese corporates. Key profitability ratios have improved over the past several years, but still lag those of market leaders. MUFG Bank acquired a majority stake in BAY in 2013, and since then has further integrated BAY into the group's operations; the parent provides important ordinary support, particularly, in funding and management.

SUPPORT RATING AND SUPPORT RATING FLOOR (SRF)

The Support Rating and SRF of BBL, KBank, SCB and KTB 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 those for the other three banks, as Fitch views that KTB is important not only systemically to the financial sector, but is also strategically to the government. KTB is the only majority state-owned commercial bank, with close operational and branding links to Thailand's Ministry of Finance.

BAY's Support Rating is based on Fitch's view that it is extremely likely to receive extraordinary support from its parent, MUFG Bank, if needed. Despite BAY's D-SIB status, Fitch has not assigned a SRF to it as its ratings are driven by institutional support.

SUBORDINATED DEBT

BBL and SCB 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.

The Basel III Tier 2 subordinated Thai baht-denominated notes of KBank, BAY and KTB are rated one notch below their National Long-Term Ratings to reflect their lack of mandatory full write-down features, as well as their higher loss-severity risks than senior unsecured instruments, which arise from their subordinated status. There is no notching for non-performance risks as the notes' key terms exclude going-concern loss-absorption features.

KTB's US dollar-denominated Basel III Tier 2 subordinated debt is rated one notch below the IDR. Fitch has used the support-driven IDR rather than the VR as the anchor, since the agency believes government support would flow through to KTB to prevent non-viability. The one-notch differential reflects the notes' subordinated status, the presence of partial rather than mandatory full write-down features, and 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 are sensitive to changes in their standalone profile as indicated by their VR.

The IDR, National Ratings and ratings on KTB's senior debt would be affected by changes in its Support Rating Floor, which in turn reflects Fitch's view on the sovereign's capacity and propensity to provide timely extraordinary support to KTB.

BAY's IDRs, National Ratings and senior debt ratings are sensitive to changes in Fitch's assumptions about the ability or propensity of MUFG Bank to support BAY. No upside is possible to the IDR, which is at Thailand's Country Ceiling, or the National Ratings, which are already at the highest level on the Thai national scale. There may be downside to the ratings if MUFG Bank is downgraded, or if Fitch believes that there is a reduction in MUFG Bank's propensity to extend support to BAY.

The National Ratings of Kasikorn Securities and SCB Securities would be similarly affected by changes in their parents' National Ratings. The ratings could also be affected by any perceived changes in the propensity of KBank or SCB to support their subsidiaries, for example, if the parents materially reduced their shareholding or their operational and management linkages. However, Fitch does not expect such changes in the medium term.

VIABILITY RATINGS

There is unlikely to be upside to the VRs on BBL, KBank and SCB in the near term. The ratings are already at the same level as the Thai 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 rating action for the VRs on BBL, KBank and SCB. For all three banks, a significant and sustained deterioration beyond Fitch's expectations in either asset quality or profitability (including much higher risk appetite, which could raise the prospects for future deterioration) without adequate buffers in terms of loan loss reserves and capitalisation could lead to a negative rating action on their VRs.

KTB's VR is most sensitive to changes in capital adequacy. Fitch may downgrade its VR if asset-quality risks increase and reduce the bank's capital ratios below those of its 'bbb-' peers. This may happen if KTB adopts a more aggressive policy-lending role, leading to a rapid deterioration in its credit profile. Conversely, a VR upgrade can happen if both its asset quality and capitalisation improve in a sustained and significant manner and other key credit metrics remain broadly stable.

BAY's VR may see upside if the bank can further leverage its integration with MUFG Bank into a corporate profile that is the equal to those its large domestic peers, while also adding to its capital buffers without changing its risk appetite. Conversely, there may be downside pressure if there is a severe and sustained deterioration in asset quality and earnings, or a large decline in liquidity buffers.

SUPPORT RATING AND SUPPORT RATING FLOOR (SRF)

Fitch may re-assess the SRFs on BBL, KBank and SCB if the government's ability to provide support to these banks diminishes. This may happen if the agency downgrades Thailand's Long-Term Foreign-Currency IDR. Changes in Thailand's Long-Term Foreign-Currency IDR would trigger changes in a similar direction in KTB's SRF.

The SRFs on all four banks could change if Fitch changes its view on the propensity of the state to provide support to these systemically important banks. However, Fitch does not expect such changes over the medium term.

Fitch may change BAY's Support Rating of '1' if MUFG Bank reduces its propensity to support BAY. This can happen if the group significantly lowers its shareholding in BAY or reverses recent integration measures. However, Fitch deems this unlikely in the short term. Changes in MUFG Bank's Long-Term IDR may also affect BAY's Support Rating.

SUBORDINATED DEBT
The subordinated debt instruments of all five banks would be affected by changes in the anchor ratings for the respective instruments, namely their Long-Term Foreign-Currency IDRs or National Long-Term Ratings.
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'
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+'
Basel III Tier 2 subordinated debt 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)'
Legacy Tier 2 subordinated debt affirmed at 'AA(tha)'
KTB
Long-Term Foreign-Currency IDR affirmed at 'BBB'; Outlook Stable
Short-Term Foreign-Currency IDR upgraded to 'F2' from '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)'; Outlook Stable
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'
Basel III Tier 2 subordinated US dollar debentures affirmed at 'BBB-'
National rating on THB20 billion short-term debenture programme affirmed at 'F1+(tha)'
Basel III Tier 2 subordinated debt affirmed at 'AA(tha)'
BAY
Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '1'
National Long-Term Rating affirmed at 'AAA(tha)'; Outlook Stable
National Short-Term Rating affirmed at 'F1+(tha)'
Long-term senior unsecured debt affirmed at 'AAA(tha)'
Basel III Tier 2 subordinated debt affirmed at 'AA+(tha)'
Kasikorn Securities
National Long-Term Rating affirmed at 'AA(tha)'; Outlook Stable
National Short-Term Rating affirmed at 'F1+(tha)'
SCB Securities
National Long-Term Rating affirmed at 'AA(tha)'; Outlook Stable
National Short-Term Rating affirmed at 'F1+(tha)'

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