Fitch is withdrawing TTB's Support Rating of '2' and Support Rating Floor of 'BBB' as they are 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 TTB a Government Support Rating (GSR) of 'bbb'.
KEY RATING DRIVERS
TTB's IDRs and National Ratings are driven by its GSR, which reflects Fitch's view on the government's ability and propensity to provide extraordinary support to TTB, if needed. Support prospects are mainly driven by TTB's systemic importance as the sixth-largest bank in Thailand, and its designation by the Bank of Thailand as a domestic systemically important bank (D-SIB).
The National Ratings also take into account the bank's credit profile relative to other entities rated on the Thai national scale.
The Stable Outlook is consistent with the Outlook on Thailand's sovereign ratings (BBB+/Stable), and is also based on Fitch's view that the state's support propensity is unlikely to change in the near term.
TTB's Viability Rating (VR) reflects its business profile, which has been supported by greater scale in its domestic franchise and a more diversified business mix after a merger in December 2019, although the bank has yet to realise the full benefits from the merger. The VR also takes into account TTB's adequate headroom for key financial factors, such as asset quality and capitalisation, as well as a gradually improving operating environment that implies reduced downside risk.
State's High Propensity to Support: TTB's GSR is based on Fitch's belief that there is a higher propensity for the state to provide extraordinary support to TTB due to its systemic importance. TTB is the sixth-largest bank in Thailand with market shares in deposits and loans of around 8% and 9%, respectively, at end-2021. Moreover, TTB has been designated as the sixth D-SIB in Thailand in 2021, which reflects the bank's substantial market presence, as well as a high level of interconnectedness in the financial sector and its complexity of financial products.
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.
Improving Market Position: TTB has a substantial franchise, and its scale and client diversity improved significantly after the merger in December 2019 with Thanachart Bank Public Company Limited. Fitch expects the bank's financial performance to improve over the medium term due to its larger market position, which is reflected in the positive outlook on the business profile factor score of 'bbb-'. We would consider revising the outlook to stable if it becomes clearer that the merger will not yield any meaningful and sustainable improvement in key aspects of the bank's financial profile.
Rising Impaired Loans Manageable: TTB's asset quality may come under pressure in 2022 as regulatory relief on loans (12% of loans at end-2021) is lifted during the year. However, Fitch expects the increase in the impaired loan ratio to be limited (2021: 3.1%) and remain commensurate with the 'bbb' implied category score for asset quality.
Downside risks may be mitigated by an improving economic recovery, as well as TTB's recent loan contraction of 1.5% in 2021, compared with average industry loan growth of 6%. Moreover, TTB has maintained satisfactory reserve coverage of 128% at end-2021, providing some buffer for write-offs and unexpected downside at the current rating.
Profitability Improving From Low Base: TTB's operating profit/risk-weighted assets (OP/RWA) ratio of 1.0% in 2021 remains low compared with the sector average of 1.5% and with those of large-bank peers. Fitch expects TTB's profitability to recover gradually, supported by higher business volumes in line with the economic recovery, and slightly lower impairment charges. The bank may have stronger earnings capacity after the merger, but meaningful improvements will take some time to materialise.
Satisfactory Capital Buffer: TTB's common equity Tier 1 (CET1) capital ratio was 14.4% at end-2021, and we do not expect substantial changes in the near term. Capital levels will be supported by internal capital generation from a gradual improvement in earnings. Nonetheless, Fitch expects TTB's CET1 ratio to remain lower than higher-rated peers, but still appropriate at the current factor score, and to provide an adequate buffer against unexpected downside risks.
Steady Funding, Healthy Liquidity: TTB's loan-to-deposit ratio of 103% at end-2021 was above that of large-bank peers and the sector average of 94%. This was because TTB's deposit growth was much slower than peers' in 2020 and 2021 as the bank focused on optimising deposit costs after its merger. Nevertheless, we view the bank's funding profile as broadly stable, and supported by its domestic franchise. The bank's liquidity coverage ratio has also generally indicated a healthy level of liquid assets, and was 172% at end-2021.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRs and National Ratings:
Negative action on TTB's GSR could lead to similar action on TTB's IDRs and National Long-Term Rating. The National Long-Term Rating of TTB could also be reassessed on a perceived weakening relative to the universe of entities rated on the Thai national rating scale.
GSR:
There could be negative action on the GSR if the government's ability to provide support declines. This may, for example, happen if Fitch downgrades Thailand's Long-Term Foreign-Currency IDR. There may also be negative rating action if Fitch believes that the state has reduced its propensity to provide support to TTB, such as through a large decline in the bank's perceived level of systemic importance (e.g. no longer being designated as a D-SIB), or significant regulatory changes.
VR:
The VR could be downgraded if TTB's key financial ratios deteriorate by more than we expect, most likely as a result of a more prolonged economic recovery and the bank's market position not fully yielding benefits to its financial profile.
This may be indicated by an impaired-loan ratio of above 6%, a loan-loss coverage ratio of below 100% (end-2021: 128%) and a declining OP/RWA ratio to below 1.0% over the next two or more years. A failure to maintain sufficient capital buffers against heightening risks, indicated by a CET1 ratio consistently below 13.0%, could also be negative for the VR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDRs and National Ratings:
There could be positive rating action on TTB's Long-Term IDR and National Long-Term Rating if there were similar changes in the GSR. The upgrade of National Rating on TTB would also take into account the bank's credit profile relative to other entities on the Thai national scale.
GSR:
Improvement in the sovereign's ability to provide support to TTB, such as reflected in an upgrade of the sovereign rating, may prompt an upgrade of the GSR as long as other assumptions about support propensity remain unchanged. Should the sovereign rating remain unchanged, it is unlikely that there would be further positive action on TTB's GSR.
VR:
The VR could be upgraded upon evidence that TTB's domestic franchise has strengthened, its business model has improved and that these factors are likely to lead to a sustained improvement in its overall financial strength to levels that are more comparable with those of higher-rated domestic peers.
For example, a sustained impaired loan ratio of below 2.7%, with higher OP/RWA of above 1.5% and a CET1 ratio of above 15.0%, without a meaningful change in risk appetite. However, this is unlikely to occur in the near term due to the still-challenging operating environment.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Senior Debt:
The senior debt ratings are equalised with the Long-Term IDR, as they represent unsecured and unsubordinated obligations of the bank.
Subordinated Debt:
TTB's Basel III Tier 2 subordinated Thai-baht notes are rated two notches below the implied national rating of its VR, which is the anchor rating for the notes. This is consistent with Fitch's baseline notching approach for subordinated debt in our Bank Rating Criteria, as we believe the notes have poorer recovery prospects than senior unsecured instruments. The notes' non-viability trigger is defined as emergency capital assistance from the central bank or any other empowered government agency. There is no additional notching for incremental non-performance risks, as the notes do not incorporate going-concern loss absorption, such as coupon omission or deferral features.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of TTB's Long-Term IDR would lead to a downgrade of the senior debt ratings.
The rating on the Basel III Tie 2 subordinated debt is sensitive to any changes in TTB's standalone credit profile, which is reflected in its VR. Therefore, a downgrade of TTB's VR is likely to lead to a downgrade of the subordinated debt, while also taking into account relativities on the Thai national scale.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of TTB's Long-Term IDR would lead to an upgrade of the senior debt ratings.
An improvement in TTB's standalone credit profile could lead to positive rating action on TTB's Thai-baht subordinated debentures. For example, an upgrade of the VR could lead to a positive re-assessment, though Fitch would also take into account risks relative to other issuers on the Thai national rating 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
TTB's IDRs, GSR, National Ratings, and senior debt ratings are linked to Thailand's sovereign ratings.
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