Fitch Downgrades Bangkok Bank to 'BBB' on Coronavirus Outbreak

Stocks and Financial Services Press Releases Friday April 3, 2020 13:14
Bangkok--3 Apr--Fitch Ratings
Fitch Ratings has downgraded Bangkok Bank
Public Company Limited's (BBL) Long-Term Issuer Default Rating (IDR) to 'BBB'
from 'BBB+', and affirmed the Short-Term IDR at 'F2' and the National Long-Term
Rating at 'AA+(tha)'. The Outlooks are Stable.
At the same time, Fitch downgraded BBL's
senior unsecured debt rating to 'BBB' from 'BBB+', downgraded the subordinated
notes to 'BB+' from 'BBB' and removed the ratings from Under Criteria
Observation.
The downgrade reflects BBL's challenging
operating environment and large-scale economic disruptions from the coronavirus
pandemic. These follow Thailand's weak operating environment in the past
several years on slower domestic and global economic growth. The Bank of
Thailand's relief measures to assist in debt restructuring cannot eliminate the
risks for weaker and more vulnerable debtors. For details on Thailand's
operating environment, please see "Coronavirus Increases Challenges for
Thai Banks' Operating Environment", dated 2 April 2020 at
https://www.fitchratings.com/research/banks/coronavirus-increases-challenges-for-thai-banks-operating-environment-02-04-2020.
The duration and trajectory of the
coronavirus outbreak remains uncertain. As such, Fitch expects BBL's asset
quality and performance to be significantly affected over the next two years in
a base-case scenario, with core ratios weakening significantly compared with
2019. BBL will be affected by rising credit costs and its top-line revenue will
continue to soften because of the low interest-rate environment and a
moderation in non-interest income, while its capital position will also weaken
as a result of its pending acquisition of Indonesia-based PT Bank Permata Tbk
(Permata; AAA(idn)/Rating Watch Negative).
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
The IDRs, National Ratings and ratings on
the senior debt of BBL are driven by its standalone credit profile, which is
denoted by its VR. The senior debt represents unsecured and unsubordinated
obligations of the bank and is equalised with the bank's Long-Term IDR. The
Short-Term IDR corresponds to criteria and takes into consideration Fitch's
assessment of the bank's funding and liquidity profile, which is assessed at
'bbb+'.The affirmation of the National Ratings reflects Fitch's view of BBL's
credit profile relative to Thailand's national-rating universe, which remains
little changed despite the bank's weakening trends, as indicated by the
downgrade of the IDRs.
VR
The VR of BBL reflects the bank's leading
domestic franchise with a particular strength in corporate and international
banking. That said, the rating also reflects our assessment that the operating
environment will weaken significantly with a sharp contraction in the Thai
economy. The rating incorporates our belief that BBL's earnings will decline
because of those operating and economic challenges, with deterioration in asset
quality already contributing to persistently high provision costs. Furthermore,
the pending acquisition of Permata may expose BBL to more earnings volatility
in the medium-term through a greater exposure to a weaker operating
environment.
The Permata acquisition is scheduled for
completion by year-end. BBL's common equity Tier 1 (CET1) ratio is likely to
decrease by up to 3%, after the transaction is finalised. BBL expects to
increase core capital levels gradually through profit retention; however, the
operating environment challenges will significantly hurt capital-generating
capacity at least in the near-term. Fitch therefore sees greater potential for
a delay in improving capitalisation.
BBL's credit profile and loss-absorption
buffers are superior relative to most other lower-rated banks operating in similar
environments. This should limit downward pressure on the bank's ratings in the
next 12-18 months. BBL's above-peer liquidity position and loan loss coverage
ratio should support the bank's capability to withstand the increasingly
challenging environment.
SUPPORT RATING AND SUPPORT RATING FLOOR
(SRF)
The Support Rating and SRF of BBL are
based on BBL's systemic importance to the Thai financial system, as reflected
by its significant deposit market share of 17% as of end-2019. We believe that
there is a high probability the government would provide extraordinary support
to the bank, if needed, given its role as one of Thailand's domestic
systemically important banks (D-SIBs).
SUBORDINATED DEBT
The downgrade of BBL's subordinated notes
(Basel III-compliant Tier 2 and non-Basel III-compliant Tier2) reflects the
lower Long-Term IDR, which is an anchor rating of BBL's subordinated debt, and
the changes in Fitch's updated criteria on the baseline notching for banks'
subordinated (Tier 2) debt to two notches below the anchor rating, from the
previous approach of one or two notches. This is because we believe there is a
heightened risk of significant losses for this debt class, with the two notches
reflecting our view of the notes' loss severity risk in comparison with senior
debt. The notes have no going-concern loss-absorption feature, and hence there
is no additional notching for non-performance risk.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Factors That Could, Individually or
Collectively, Lead to Positive Rating Action/Upgrade:
The IDRs, National Ratings and ratings on
the senior debt of BBL are sensitive to changes in its standalone profile as
indicated by its VR. Positive action on BBL's Viability Rating could lead to
similar action on the bank's Long-Term IDR and senior debt rating.
Changes in Fitch's perception of BBL's
credit profile relative to the national-rating universe in Thailand could
affect BBL's National Ratings. However, an upgrade of the National Ratings is
not probable in the near term, given BBL's credit profile and rating relative
to local large-bank peers.
Factors That Could, Individually or
Collectively, Lead to Negative Rating Action/Downgrade:
Negative action on the Viability Rating
would lead to similar action on the IDR and senior debt rating, although
downside may be limited to Fitch's assessment of the Support Rating and Support
Rating Floor, the latter of which is currently 'BBB-'. A downgrade of BBL's
National Ratings would likely arise from a weakening in its overall credit
profile on a relative basis to the national-rating universe of Thai financial
institutions.
VR
Factors That Could, Individually or
Collectively, Lead to Positive Rating Action/Upgrade:
The VR could be upgraded to 'bbb+' if the
asset-quality trend is more consistent with higher-rated banks operating in a
'bbb' category environment (eg NPL ratio of below 3%), combined with
maintenance of sound buffers in loan-loss reserves and core capital (eg CET1
ratio sustained above 16%). This would also depend on profitability being
sustainably improved, without an increase in risk appetite, as this would aid
internal capital generation or retention.
Factors That Could, Individually or
Collectively, Lead to Negative Rating Action/Downgrade:
The VR could be downgraded to 'bbb-' if
BBL's capitalisation deteriorated further to be an insufficient buffer to poor
asset quality; for example, the CET1 ratio weakens to lower than 13% over the
next two years with its non-performing loan (NPL) ratio above 6% and loan-loss
coverage ratio lower than 120%. In our view, this could arise if BBL's
profitability were to be further compromised, with the potential for
deterioration in its profitability and asset quality, reflecting both the
challenging operating environment and the bank's perceived appetite for risk.
SUPPORT RATING AND SUPPORT RATING FLOOR
(SRF)
Factors That Could, Individually or
Collectively, Lead to Positive Rating Action/Upgrade:
The Support Rating Floor could be upgraded
if Fitch assesses that there is a higher propensity for the state to provide
support to D-SIBs, including BBL. However, Fitch does not expect such changes
over the medium term. An upgrade of Thailand's Long-Term Foreign-Currency IDR
of 'BBB+'/Stable may also indicate the government's higher ability to support
banks (including BBL), but any assessment on the Support Rating Floor would
also need to consider there is no lower propensity to support the banks.
Factors That Could, Individually or
Collectively, Lead to Negative Rating Action/Downgrade:
Fitch may take negative action on BBL's
Support Rating and Support Rating Floor if the government's ability to support
the bank diminishes. This may happen if the agency downgrades Thailand's
Long-Term Foreign-Currency IDR. Furthermore, if Fitch believes there is a lower
propensity for the state to provide support to D-SIBs, including BBL, the
rating could be downgraded. However, Fitch does not expect such changes over
the medium term.
SUBORDINATED DEBT
Factors That Could, Individually or
Collectively, Lead to Positive Rating Action/Upgrade:
The subordinated debt instruments of BBL
would be upgraded if its Long-Term IDR is upgraded.
Factors That Could, Individually or
Collectively, Lead to Positive Rating Action/Downgrade:
The subordinated debt instruments of BBL
would be downgraded if its Long-Term IDR is downgraded.
ESG CONSIDERATIONS
The highest level of ESG credit relevance,
if present, is a score of 3. This means ESG issues are credit-neutral or have
only a minimal credit impact on the entity(ies), either due to their nature or
to the way in which they are being managed by the entity(ies).
For more information on Fitch's ESG
Relevance Scores, visit www.fitchratings.com/esg.
BEST/WORST CASE RATING SCENARIO
Ratings of financial institutions issuer have a
best-case rating upgrade scenario (defined as the 99th percentile of rating
transitions, measured in a positive direction) of three notches over a
three-year rating horizon; and a worst-case rating downgrade scenario (defined as
the 99th percentile of rating transitions, measured in a negative direction) of
four notches over three years. The complete span of best- and worst-case
scenario credit ratings for all rating categories ranges from 'AAA' to 'D'.
Best- and worst-case scenario credit ratings are based on historical
performance. For more information about the methodology used to determine
sector-specific best- and worst-case scenario credit ratings, visit
www.fitchratings.com/site/re/10111579.
REFERENCES FOR SUBSTANTIALLY MATERIAL
SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used
in the analysis are described in the Applicable Criteria.
Additional information is available on
www.fitchratings.com

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