KEY RATING DRIVERS
Support from Government: KTB's IDRs and National Ratings are driven by its GSR, which is underpinned by Fitch's expectation of the Thai government's (BBB+/Stable/F1) ability and propensity to provide extraordinary support to KTB, if needed. KTB's National Ratings also take into consideration the bank's credit profile relative to other entities rated on our Thai national rating scale. KTB's 'AAA(tha)' rating reflects the lowest expectation of default risk compared with other issuers in Thailand.
The Stable Outlook is consistent with the Outlook on Thailand's sovereign ratings, and is also based on Fitch's view that support propensity is unlikely to change in the near term.
Systemic Importance: KTB's GSR incorporates the bank's position as a systemically important commercial bank in Thailand, and its status as the only commercial bank that the government majority owns. Therefore, we have assessed KTB's GSR at 'bbb+', which is one notch higher than the country's other domestic systemically important banks (D-SIBs). The GSR takes into account the government's ability to support banks, which is indicated by the sovereign's Long-Term IDR.
Fitch believes that the sovereign's financial flexibility, relative to the rating level, remains high with adequate fiscal headroom to support the banks, if necessary. KTB is one of the largest commercial banks in Thailand, with a broad nationwide presence and a sound franchise, and has been named as one of Thailand's six D-SIBs by the Bank of Thailand.
Strategic Importance: Fitch views KTB as a long-term strategic investment of the government. The bank has close linkages with the Ministry of Finance, and acts as the main cash management provider for state entities. In addition, KTB has supported government projects over the past few years that leverage the bank's mobile applications and branch network for pandemic disbursements.
Operating Environment Recovering from Pandemic: The operating environment (OE) is gradually improving and will support Thai banks' performance, with Fitch expecting GDP growth of 3.2% in 2022 and 4.5% in 2023. The OE score is unchanged at 'bbb' with a stable outlook - the implied score for the OE is in the 'bb' category, but Fitch applies a positive adjustment based on the sovereign rating. The government has the ability and willingness to support business activity and market stability, as evident from its measures during the Covid-19 pandemic.
Solid Domestic Franchise: KTB's business profile score of 'bbb' is based on the bank's scale and franchise as one of the largest banks in Thailand. Like other Thai D-SIBs, KTB has a universal banking franchise and a diverse client base. KTB's strong state linkages contribute to a solid deposit base, and also helped the bank achieve a significant increase in retail clients during the pandemic.
Asset Quality Remains Under Pressure: KTB's asset quality score of 'bb+' incorporates our view of some continued pressure on the impaired loans ratio over the next few years as the economy slowly recovers from the pandemic. The impaired loans ratio improved to 4.2% by end-March 2022, from 4.9% at end-2019, partly aided by high loan growth. Even so, Fitch expects a slight rise in the ratio during 2022-2023. KTB's impaired loans ratio remains high compared with the industry average of 3.6%, but significant downside risks can be mitigated by loan-loss allowances coverage of 159%.
Earnings Recover but Challenges Remain: KTB's earnings are improving, but we expect the four-year average of operating profit/risk-weighted asset (RWA) ratio (the four-year average in 2018-2021 was 1.6%) to remain lower against most large-bank peers. KTB's performance may receive near-term support from reduced credit impairment charges and a slightly improving OE. However, the earnings score of 'bb+' also incorporates Fitch's expectation that profitability could be subject to volatility and cyclical influences.
Improved Capitalisation is Sustainable: KTB's capitalisation score has been revised to 'bbb' from 'bbb-', reflecting the bank's consistent record in improving common equity Tier1 (CET1) ratio to above 15% in recent years. Fitch believes that this improvement is sustainable, as better prospects for earnings and modest loan growth will not put undue pressure on capital. Hence KTB's core capitalisation provides some headroom to absorb downside risks that may arise, such as from asset quality.
Stable Funding and Liquidity: KTB's funding is supported by a high composition of stable retail deposits, its deposit franchise for state entities and depositor confidence reflecting its state linkages. The bank's ratio of current and savings accounts to total deposits has been consistent at above 80% in recent years, reflecting its sound transactional banking franchise.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
There could be negative rating action on KTB's Long-Term IDR and National Long-Term Rating if there is similar action on the bank's GSR. KTB's National Long-Term Rating would also take into account KTB's support-driven profile relative to other entities on our Thai national rating scale.
KTB's Short-Term IDR would be downgraded if its Long-Term IDR is downgraded.
KTB's GSR would be downgraded if the government's ability to provide support deteriorates, which may be indicated by a downgrade of Thailand's Long-Term IDR. The GSR could also be downgraded if we view there is a decline in the government's propensity to support the bank. For example, this may arise from a sharp decline in its systemic importance, along with a substantial decline in the level of government linkages. However, Fitch views any decline in support propensity as unlikely in the near to medium term.
KTB's VR could be downgraded to 'bb+' if the bank's financial buffers were to worsen significantly, which would signify an inadequate risk cushion and could also indicate a worse-than-expected business profile that would be unable to sustain through-the-cycle performance. This may be indicated by our expectation of a CET1 ratio of below 13% for a sustained period (1Q22: 15.6%), and loan-loss allowances coverage of below 100% combined with an impaired loans ratio sustained above 6%.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
KTB's Long-Term IDR could be upgraded if its GSR is upgraded.
There is no upside to the National Ratings, which are at the top end of the scale.
KTB's GSR is equalised with the sovereign rating, so there may be positive rating action only if there is a similar action on Thailand's Long-Term Foreign-Currency IDR, which would indicate the government's higher ability to support KTB. However, any such assessment would also have to take into consideration whether Fitch's other assumptions about support propensity remain unchanged at the sovereign's higher rating level.
The slow economic recovery means there are limited prospects for a VR upgrade in the near term. Still, sustained improvements in the bank's asset quality and earnings could lead to positive rating action, such as the impaired loans ratio staying below 3.5% (2021: 4.2%) and operating profit/RWA ratio sustained above 2.5% (2021: 1.5%), combined with maintenance of sound capital buffers.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Senior Debt
The rating on KTB's senior unsecured notes is 'AAA(tha)', which is the same as KTB's National Long-Term Rating, as the instruments represent its unsecured and unsubordinated obligations.
Subordinated Debt
The Basel lll Tier 2 subordinated notes are rated two notches below KTB's National Long-Term Rating, in line with Fitch's baseline approach in our criteria, to reflect their higher loss-severity risk compared to senior debt. There is no additional notching for non-performance risk, as the notes do not incorporate going-concern loss absorption, such as coupon omission or deferral features. Fitch uses the government support-driven National Long-Term Rating as the anchor rating for these Tier 2 notes, to reflect our expectation that the state would provide pre-emptive support to KTB prior to the point of non-viability.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Any negative rating action on KTB's National Long-Term Rating would have a similar effect on the bank's senior bonds and subordinated notes.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
There is no upside to the senior bonds as the anchor rating, the National Long-Term Rating, is at the top end of the scale.
There may be upside to the subordinated notes if Fitch re-assesses that loss severity upon non-performance would not be poor, and would hence warrant one rather than two notches. However, Fitch does not expect any changes in the near-term.
VR ADJUSTMENTS
The OE score of 'bbb' has been assigned above the 'bb' category implied score for the following adjustment reason: sovereign rating (positive).
The earnings score of 'bb+' has been assigned below the 'bbb' category implied score for the following adjustment reason: earnings stability (negative).
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
KTB's GSR, IDRs and National Ratings are linked to Thailand's sovereign Long-Term Foreign Currency IDR.
ESG CONSIDERATIONS
KTB has an ESG Relevance Score of '4' for Governance Structure, due to its role as a state-owned bank, and the potential for the state to affect the bank's risk governance, and ultimately its financial profile, which has a negative impact on the credit profile, and relevant to the international ratings in conjunction with other factors.
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