Fitch is withdrawing UOBT's Support Rating as it is no longer relevant to the agency's coverage, following the publication of our updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned UOBT a Shareholder Support Rating (SSR) of 'a-'.
A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS
IDRs and NATIONAL RATINGS
Support Expectations: UOBT's IDRs and National Ratings are driven by the SSR, which is in turn driven by Fitch's expectations of extraordinary support from the bank's Singapore-based parent, United Overseas Bank Limited (UOB; AA-/Negative/aa-). UOBT's Short-Term IDR is at the higher option of 'F1', reflecting the support-driven nature of the credit, and Fitch's view that there are no material impediments to prompt funding support from the parent.
UOBT's National Ratings also take into account the bank's support-driven credit profile relative to other issuers on the national scale, with UOB's rating being multiple notches higher than Thailand's sovereign rating of 'BBB+'. UOBT's 'AAA(tha)' rating reflects the lowest expectation of default risk compared with other issuers in Thailand.
SSR
Strong Linkages: UOBT's SSR incorporates the strong linkages between the bank and its parent. We believe any default at the subsidiary would have high reputational risk for the parent. The Thai subsidiary plays a key and long-standing role in the group's regional growth aspirations in south-east Asia. There are clear branding linkages with the parent, as well as marketing synergies and operational integration. Furthermore, UOB owns 99.7% of UOBT, with high levels of management control and oversight.
UOB has a strong ability to support UOBT, reflected in the parent's VR of 'aa-'. However, UOB's ability to provide support is also subject to the transfer and convertibility risks indicated by Thailand's Country Ceiling of 'A-', which acts as a cap to the Thai subsidiary's SSR.
VR
Moderate Franchise Constrains VR: UOBT's VR reflects its relatively limited presence in Thailand, where it has a deposit market share of around 3%. The limited scale leads to less business and revenue diversity compared with larger banks in the market. Nevertheless, the bank has built niches in the mortgage segment as well as in serving corporates with cross-border requirements.
The bank's presence will also grow after the integration, later in 2022, of Citibank's former retail banking operations in Thailand. Adding Citibank's sizeable operations in the Thai unsecured consumer finance segment would expand UOBT's loan portfolio by around 20%. Successful integration of the business over time would boost UOBT's presence and earnings prospects.
Sovereign Support for Environment: The implied score for Thai banks' operating environment is in the 'bb' category, but Fitch applies a positive adjustment based on the sovereign rating of 'BBB+'/Stable. The sovereign has the ability to support business activity and financial stability, evident from its measures during the Covid-19 pandemic such as its fiscal policy or the support provided by state-owned financial institutions. The sovereign's debt also remains low relative to that of similarly rated peers.
Asset Quality Pressures to Ease: UOBT's impaired-loan ratio rose to 3.8% by end-June 2021 from 2.9% at end-December 2019 due to the pressures of the pandemic, but Fitch expects impairments to gradually decline due to improving economic activity and the bank's cautious approach to loan classifications since the start of the pandemic.
Fitch believes the planned integration of Citibank's retail assets would not materially alter UOBT's asset quality prospects, as the new assets should be of broadly similar quality to UOBT's existing loans.
Earnings Recovering from Pandemic's Lows: UOBT's operating profit to risk-weighted assets (OP/RWA; four-year average around 1.4%) had been hit in 2020 by provisioning expenses, as credit costs rose to 75% of pre-impairment operating profit. We expect the pressure to ease substantially in 2022, although performance will remain below pre-pandemic levels. Citibank's retail assets may provide a boost to earnings ratios over the medium term, but the 2022 effect will be muted as the transaction would not occur until the middle of the year and will be accompanied by one-off expenses.
Capital to Remain Adequate: UOBT has maintained sound core capital, with its CET1 ratio of 17% at end-June 2021 (sector average in December 2021: 15.8%). The negative outlook on UOBT's capital score of 'bbb' reflects our view that the inclusion of Citibank's retail assets is likely to lead to lower capital ratios.
Nevertheless, Fitch expects the bank's CET1 ratio after the transaction to remain commensurate with a 'bbb' category implied score (i.e. maintained above 13%) and to be gradually rebuilt from internal capital generation. If Fitch were to lower only the capital score, this would be unlikely to affect the overall VR.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRs, SSR and National Ratings
Very substantial deterioration in the ability or propensity of UOB to support UOBT could lead to downside for the SSR, and hence the Long-Term IDR and National Ratings. A multiple-notch downgrade of the parent's VR to or below the Thai Country Ceiling could lead to a re-assessment of shareholder support ability.
There could also be negative rating action on the IDR, SSR and National Ratings from a large reduction in the linkages between UOBT and UOB, which would mean a lower likelihood of shareholder support. This may be indicated by a decline in UOB's shareholding in UOBT to below 75%, combined with reduced management control and strategic ties. However, Fitch does not expect such changes in support propensity to occur in the medium term.
There would be downside to the Short-Term IDR if the bank's Long-Term IDR were to be downgraded to 'BBB'.
Any negative rating action on the National Ratings would also have to take into consideration the bank's profile relative to other issuers in Thailand.
VR
There may be downside to UOBT's VR if we were to lower the score on several of the bank's rating factors, which would indicate a significantly worse-than-expected business environment and financial performance. This may occur if UOBT's impaired-loan ratio were to be sustained above 4% (June 2021: 3.8%), combined with reduced buffers such as the OP/RWA ratio being sustained at around 1% and a significantly weaker-than-expected CET1 ratio that falls below 13% (June 2021: 17%) with no prospects of a remedy in the next two years. Such a worsening in the financial profile - not our base case - could reflect a weaker business profile than our current assessment.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDRs, SSR, and National Ratings
There is no upside to the bank's Long-Term IDR or SSR unless Thailand's Country Ceiling is revised upwards. There is no upside to the Short-Term IDR, unless the bank's Long-Term IDR is upgraded to 'A'.
There is no upside to the National Long-Term Rating, which is at the top end of the scale.
VR
There may be upside to the VR from significant improvements in the bank's franchise that leads to enhanced competitiveness, combined with stronger loss absorption buffers. This may be indicated by the bank's impaired-loan ratio falling consistently to below 3%, combined with OP/RWA of above 1.5% and a CET1 ratio of above 17%.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
UOBT's senior bonds are rated at the same level as the bank's National Long-Term Rating, as they represent the bank's unsubordinated and unsecured obligations.
UOBT's Basel III Tier 2 subordinated notes are rated two notches below the anchor rating, in line with the baseline notching for these types of instruments in Fitch's rating criteria. Fitch uses the support-driven National Long-Term Rating as the anchor for the notes, as we believe that the shareholder would provide support to UOBT prior to the point of non-viability. The two notches represent loss severity risk, to reflect the notes' subordinated status. There is no additional notching for non-performance risk, as the notes have no going-concern loss absorption features.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Any negative rating action on the bank's National Long-Term Rating would have a similar impact on the bank's senior bonds and its subordinated notes.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
There is no upside to the senior bonds or to the subordinated notes, as the anchor rating, the National Long-Term Rating, is at the top end of the scale.
VR ADJUSTMENTS
The operating environment score of 'bbb' has been assigned above the 'bb' category implied score due to the following adjustment reason: sovereign rating (positive).
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
UOBT's IDRs, SSR and National Ratings are driven by the ratings of its parent, UOB.
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