KEY RATING DRIVERS
IDRS, SUPPORT RATING AND NATIONAL RATINGS
SCBT's IDRs and Support Rating are driven by our assessment of institutional support. The agency believes SCBT's parent, Standard Chartered Bank (SCB, A+/Negative/a), is likely to provide extraordinary support to the Thai subsidiary in case of need. This is based on its near-full (99.9%) ownership of the Thai subsidiary, SCBT's role in supporting the group's regional business, close operational integration, full management control and brand sharing.
Fitch has used the parent's Viability Rating of 'a' instead of its IDR as the anchor rating for institutional support, given the uncertainty over whether SCBT would benefit from a significant buffer of qualifying junior debt that raises the parent's Long-Term IDR above the Viability Rating. SCBT's Long-Term IDRs are notched down once from the parent's Viability Rating as it is in a non-core market location and it has a more limited role in the group than SCB's larger subsidiaries.
The Negative Outlook on the IDRs is consistent with the Outlook on SCB.
SCBT's National Rating reflects the bank's credit profile relative to other issuers on the Thai national rating scale. The agency believes SCBT's support-driven profile is in line with the strongest credits in the country, as SCBT's Long-Term Local-Currency IDR is higher than Thailand's sovereign rating of 'BBB+'.
VIABILITY RATING
SCBT's Viability Rating is supported by the bank's strong core capitalisation, sound liquidity and moderate risk appetite. SCBT's business model is focused on larger corporate clients and the bank has reduced its exposure to client segments that are more vulnerable to current economic conditions, such as SMEs and retail. We expect the challenging operating environment to pressure SCBT's performance and asset quality, but for the bank's impaired loan ratio to remain lower than that of similarly rated peers (end-2020: 0.3%). We also believe SCBT's lower-risk holdings of interbank loans and government securities (combined 61% of total assets at end-2020) should contribute to asset-quality stability.
Fitch expects SCBT's operating profitability to decline in 2021 due to a lower net interest margin and subdued fee income. Nevertheless, the bank's excess loan loss reserves and capitalisation can cushion unexpected losses.
SCBT's capitalisation is among the highest in the Thai banking industry, with a common equity Tier 1 ratio of 30.2% as of end-2020 (sector average 16.2%). Fitch expects the bank to sustain an above-industry-average capital ratio over the medium-term.
RATING SENSITIVITIES
IDRS, SUPPORT RATING AND NATIONAL RATINGS
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An increased ability or propensity of the parent group to provide support to SCBT could lead to an upgrade of SCBT's Long-Term Local-Currency IDR or a revision of the Outlook on the Long-Term Foreign-Currency IDR to Stable. There is no upside to the Long-Term Foreign-Currency IDR unless Thailand's Country Ceiling of 'A-' is upgraded.
The Short-Term Local-Currency IDR could be upgraded if SCBT's Long-Term Local-Currency IDR is upgraded, but the Short-term Foreign-Currency IDR is unlikely to be upgraded given the Long-Term Foreign-Currency IDR is capped at Thailand's Country Ceiling.
There is no upside to the Support Rating or the National Long-Term Rating, which are at the top end of their scales.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Any decline in SCB's ability, as indicated by its Viability Rating, to support SCBT may lead to a downgrade in the subsidiary's Long-Term IDRs and Support Rating.
A decline in the propensity of SCB support SCBT may also be negative for the subsidiary's Long-Term IDRs and Support Rating. This may be indicated by a decline in the shareholding to below 75%, combined with a decrease in the level of management control and business linkages. However, Fitch does not expect this to occur in the near term.
A downgrade of Thailand's Country Ceiling would lead to a downgrade of SCBT's Long-Term Foreign-Currency IDR and Support Rating.
SCBT's National Long-Term Rating may be downgraded if its Long-Term Local-Currency IDR is downgraded, though this would also be contingent on Fitch's assessment of SCBT's relative strengths on the Thai national rating scale.
VIABILTIY RATING
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
SCBT's Viability Rating could be upgraded to 'bbb+' if its business model becomes more diversified, its domestic franchise improves and its earnings profile recovers strongly following the economic downturn. This could include maintaining a higher operating profit/risk-weighted asset ratio of above 2.5% (2020: 2.0%) along with loan-loss allowances coverage and core capital buffers at above 17% (2020: 30.2%) over the long term.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
The Viability Rating could be downgraded to 'bbb-' if the bank's financial position were to deteriorate below Fitch's expectation. This is likely to be reflected by a downward revision to multiple rating factors. For example, an impaired loan ratio of above 5.0% (2020:0.3%) for a sustained period, combined with weaker loss absorption buffers, such as a common-equity Tier 1 ratio at below 15.0% and loan-loss coverage ratio below 120%.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers 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 https://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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
SCBT's ratings are linked to SCB's Viability Rating.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Additional information is available on www.fitchratings.com
Source: Fitch Ratings