Fitch Affirms Bank of Ayudhya at 'BBB+' and 'AAA(tha)'; Outlook Stable

Monday 01 August 2022 17:29
Fitch Ratings has affirmed Bank of Ayudhya Public Company Limited's (BAY) Long-Term Issuer Default Rating (IDR) at 'BBB+' and National Long-Term Rating at 'AAA(tha)'. The Outlooks are Stable. Fitch has also affirmed the bank's Short-Term IDR at 'F1', Shareholder Support Rating (SSR) at 'bbb+' and Viability Rating (VR) at 'bbb'. A full list of rating actions is below.

Shareholder Support Drives Ratings: BAY's IDRs and National Ratings are driven by its SSR, which reflects Fitch's expectations that the bank's Japan-based parent, MUFG Bank, Ltd. (A-/Stable/a-), would provide extraordinary support to the bank, if required. BAY'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 from the parent.

The bank's National Ratings also take into account the bank's support-driven credit profile relative to other issuers on our Thai national rating scale. BAY's 'AAA(tha)' rating reflects the lowest expectation of default risk compared with other issuers in Thailand.

Strategically Important Subsidiary: BAY is 76.9% owned by MUFG, and there are significant levels of management and operational integration. BAY is one of the group's largest overseas subsidiaries, and provides banking services to MUFG's clients in Thailand, which is a key investment destination for Japanese corporates. BAY's consumer expertise is also used to support the MUFG group's other initiatives in southeast Asia.

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 of 'BBB+'/Stable. The sovereign has the ability and willingness to support business activity and market stability, as evident from its measures during the Covid-19 pandemic.

D-SIB Franchise in Thailand: BAY's VR incorporates the bank's sound banking franchise. BAY is the fifth-largest bank in Thailand with a deposit market share of around 11% at end-2021, and has been designated by the Bank of Thailand as one of the country's six domestic systemically-important banks (D-SIBs). In particular, BAY has competitive strengths and established market positions in consumer banking (such as auto loans and credit cards) and in serving multi-national clients.

Near-Term Asset Quality Pressures: Fitch expects BAY's impaired loans to rise during 2022 as the amount of loans under regulatory relief (8% as of end-March 2022) declines while the effects of the pandemic are still being felt. Nevertheless, the impaired loans ratio of 2.5% as of end-March 2022 was already substantially lower than the sector average of 3.6%, helped by the bank's lower exposures to at-risk SME clients.

Fitch expects BAY's impaired loans ratio to remain below the sector average in the near term. BAY's loan-loss allowances coverage of 176% includes pre-emptive provisioning, and represents a significant mitigation against downside risks.

Gradually Improving Earnings: Fitch expects the bank's key earnings metrics to improve during 2022 in line with the OE, with the operating profit/risk-weighted asset (RWA) ratio rising back to above 2% after being at around 1.6%-1.8% in 2020-2021. The gradual normalisation of business activity will lead to greater fee-income generating opportunities, and pressures on the net interest margin should also decline. We also expect provisioning expenses to decrease, compared with the previous two years, due to past pre-emptive provisioning.

Sound Core Capital Buffers: BAY's capitalisation score has been upgraded to 'bbb' from 'bbb-', reflecting the bank's ability to support core equity levels through internal capital generation. The common equity Tier 1 (CET1) ratio of 15.2% as of 1Q22 - substantially higher than 12.5% at end-2018 - represents a sound buffer against unexpected stresses as well as providing a base for growth.

Ordinary Support Bolsters Funding: BAY's loans/deposit ratio of 106% as of 1Q22 is higher than the sector average of 93%, but this partly reflects the bank's ongoing long-term bond issuance that provides duration matching for the bank's auto hire purchase portfolio. The bank's funding profile is also supported by its position in the MUFG group, which, aside from facilitating market access, provides a credit facility to BAY to support its lending to multinational clients.

Factors that could, individually or collectively, lead to negative rating action/downgrade:
The IDRs and National Ratings at BAY would see downside in the event of negative action on the bank's SSR.

The bank's SSR would be affected by any adverse changes in MUFG's ability or propensity to support BAY. A downgrade of MUFG's Long-Term IDR would be likely to reflect a decline in support ability, and hence also affect BAY's SSR.

A material weakening in linkages between MUFG and BAY could be a sign of reduced support propensity, and lead to negative action on the SSR. For example, this may be evidenced by a decline in shareholding to below 50%, combined with reduced funding support and management linkages. However, Fitch does not expect any decline in support propensity in the medium term.

There could be negative rating action on the VR from significant declines across several financial factors, which may reflect a much weaker-than-expected OE combined with a worse-than-expected risk profile at BAY. For example, this may be indicated by an impaired loans ratio heading towards 4% (1Q22: 2.5%), combined with weaker buffers, such as a CET1 ratio of below 13% (1Q 22: 15.2%) and an operating profit/RWA ratio sustained below 1.5% (1Q22: 2.1%).

Factors that could, individually or collectively, lead to positive rating action/upgrade:
There could be upside to BAY's Long-Term IDR if the bank's SSR is upgraded. The Short-Term IDR could be upgraded if the Long-Term IDR is upgraded to 'A' or above.

There is no upside to the National Ratings, which are at the top end of the scale.

The bank's SSR could be upgraded if there were improvements in MUFG's ability or propensity to support BAY. For example, an upgrade of MUFG's Long-Term IDR could be reflected in rating action on BAY's SSR, provided other support assumptions remain unchanged.

Upside to the VR could come from an enhanced franchise that leads to sustained competitive advantages and better-than-peer performance, combined with maintenance of strong buffers. For example, this may be reflected by an impaired loans ratio consistently below 2%, a CET1 ratio sustained above 17%, and an operating profit/RWA ratio of above 3.5%.

BAY'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.

BAY's Basel III Tier 2 subordinated notes are rated two notches below the anchor rating, in line with the base case for these types of instruments in Fitch's rating criteria. Fitch uses the bank's support-driven National Long-Term Rating as the anchor for the notes, as we believe that MUFG would provide support to BAY prior to the point of non-viability. The two notches represent loss severity risk, to reflect the notes' subordinated status compared to senior debt. There is no notching for non-performance risk, as the notes have no going-concern loss absorption features.

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 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.

The operating environment score of 'bbb' has been assigned above the 'bb' category implied score for the following adjustment reason: sovereign rating (positive).

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

The principal sources of information used in the analysis are described in the Applicable Criteria.

BAY's SSR, IDRs and National Ratings are linked to MUFG's Long-Term IDR.

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

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Source: Fitch Ratings