KEY RATING DRIVERS
Driven by VR and Support: BBL's Long-Term IDR and National Ratings are underpinned by the bank's standalone credit profile, indicated by its VR, and Fitch's expectation of support from the Thai government, denoted by its GSR. BBL's Short-Term IDR is at the higher option of 'F2' as the likelihood of government support is more certain in the near term. The National Ratings also take into account the bank's credit profile relative to that of other entities rated on the Thai national scale.
Recovery from Pandemic: The operating environment (OE) is gradually improving, which would support bank performance, with Fitch expecting Thai GDP growth of 3.2% in 2022 and 4.5% in 2023. The OE score is unchanged at 'bbb' with a stable outlook, higher than the 'bb' category implied score, as Fitch applies a positive adjustment based on the Thai sovereign rating of 'BBB+'/Stable. The sovereign has the ability and willingness to support business activity and market stability, evident from its measures during the Covid-19 pandemic.
Leading Franchise in Corporate Banking: BBL's VR reflects its strong presence as one of the largest banks in Thailand. BBL's strength is in its long-standing relationships with large corporate clients and its capacity to make big-ticket loans. BBL has the largest overseas presence among Thai banks, with branches in 14 markets and expertise in providing cross-border banking services. The bank also has a robust domestic deposit franchise, which is supported by its extensive network and strong brand recognition.
Sound Risk Buffer: BBL's impaired-loan ratio remains weighed down by the pandemic's impact. Fitch expects the ratio to remain slightly above 4% and to peak in 2022. However, the bank retains strong reserve buffers with a loan-loss allowance coverage of 221% in 1Q22 (sector average: 161%), which should help mitigate some downside risks to asset quality.
This has led us to score its asset quality at 'bbb-', above its implied 'bb' category score. The revision in the asset quality outlook to stable from negative reflects our view that the risks of a decline in asset quality have diminished and the score is unlikely to be reduced over the next two-three years in our baseline scenario of gradual economic improvement.
Gradual Profit Recovery: Fitch has revised the outlook for BBL's profitability score to stable from negative while maintaining it at 'bbb-' to reflect our belief performance bottomed in 2020 on net interest margin improvements and reduced credit costs. We expect operating profit/risk-weighted assets (RWAs) to normalise to pre-pandemic levels and exceed 1.5% (2021: 1.1%) over the next few years, supported by loan growth. The score is therefore above the 'bb' category implied for earnings and profitability.
Rebuilding Capital Buffers: Fitch's expects BBL to maintain sound core capital compared with its Thai large bank peers over the medium term. The Permata Bank acquisition in 2020 eroded BBL's common equity Tier 1 (CET1) ratio by nearly 3pp to 14%. Fitch expects BBL to gradually rebuild its core capitalisation, although the pandemic led to weaker profit accumulation over the past two years. Fitch expects the CET1 ratio to gradually improve over the next one-two years from the 15.2% in March 2022.
Consistently Strong Liquidity Profile: Fitch regards BBL's funding and liquidity profile as strong compared with that of other Thai domestic systemically important banks (D-SIBs). BBL's loan-to-deposit ratio of 81% at end-March 2022 remained better than the sector average of 93%. The bank's liquidity coverage ratio was also strong at 270% at end-2021 (sector average: 192%). The bank's robust funding and liquidity profile is supported by its strong deposit franchise in Thailand, which we believe is entrenched and sustainable.
Clear Systemic Importance: BBL's GSR reflects Fitch's perception of the bank's systemic importance to the domestic financial system, which leads to the government's high support propensity. BBL has a long history as one of Thailand's largest and well-established banks, with a strong domestic franchise and substantial international operations. The bank is designated as one of the country's six D-SIBs by the Bank of Thailand, reflecting its scale and financial system linkages. The GSR also considers the government's ability to support banks, indicated by the sovereign rating.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDR AND NATIONAL RATINGS
Negative rating action on both BBL's GSR and VR would lead to similar action on the bank's Long-Term IDR, National Long-Term Rating and senior debt rating. BBL's National Rating could also be downgraded if, in Fitch's opinion, its credit profile weakens on a relative basis in the national-rating universe of rated entities in Thailand.
The bank's Short-Term IDR would be downgraded if its Long-Term IDR were to be downgraded to 'BBB-'.
VR
The VR could be downgraded to 'bbb-' if BBL's financial position deteriorates more than we expect, which may be reflected in a downward revision of multiple rating factors. This may, for example, arise from a much weaker economic recovery due to global economic conditions, which could lead to expectations of sustained weaker financial performance and a reassessment of its business profile. These stresses may be indicated by an impaired-loan ratio of above 6% for a sustained period (1Q22: 3.9%), combined with weaker loss absorption buffers, such as a CET1 ratio of below 13% and a loan-loss coverage ratio of less than 120%, and/or not sustaining an operating profit/RWA ratio above 1.5%.
GSR
There could be negative action on the GSR if the government ability to provide support declines, which could be evident from a downgrade of Thailand's Long-Term Foreign-Currency IDR.
There may also be negative rating action if Fitch believes that the government propensity to provide support to BBL is diminished, for example, through a large decline in the bank's systemic importance or significant regulatory changes. However, we believe it is unlikely government propensity to support BBL over the medium term will weaken.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDR AND NATIONAL RATINGS
There could be positive rating action on BBL's IDRs, National Ratings and senior debt ratings following similar changes in its GSR or VR. The National Ratings of BBL would also take into account the relative creditworthiness of peers rated on the national scale.
VR
BBL's VR could be upgraded to 'bbb+' if key metrics improve sustainably, with a business profile that leads to financial performance that is consistently better than the sector's without any meaningful increase in risk appetite. This would be aided by a stronger OE and may be evident from key financial ratios such as an operating profit/RWA ratio above 2.5% (1Q22: 1.3%) and a four-year average impaired-loan ratio of less than 3%, combined with the maintenance of key buffers, such as a CET1 ratio above 16%. Nonetheless, near-term upside appears limited given the still challenging environment.
GSR
An upgrade of the GSR may be triggered by a similar action on Thailand's Long-Term Foreign-Currency IDR as this would indicate the government's higher ability to support systemically important banks such as BBL. Any upward revision of the GSR would also need to consider whether the government's propensity to support its banks remains intact.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
BBL's senior debt is rated at the same level as the bank's Long-Term IDR, as it represents the bank's unsubordinated and unsecured obligations.
BBL's Tier 2 subordinated notes are rated two notches below the anchor rating, the VR, to reflect loss severity risk compared with senior instruments. There is no additional notching for non-performance risk due to the absence of going-concern loss-absorption features. The notching is in line with Fitch's baseline approach in the criteria to rating similar subordinated debt instruments.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
BBL's senior debt would be downgraded if there is negative rating action on the anchor rating, the Long-Term IDR.
Any negative rating action on the bank's VR would have a similar impact on the bank's subordinated notes.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the Long-Term IDR would lead to similar rating action on the bank's senior debt ratings.
BBL's subordinated debt instruments would be upgraded if the VR is upgraded.
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).
The asset quality score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reason: collateral and reserves (positive).
The earnings and profitability score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reason: historical and future metrics (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
BBL's GSR is linked to the Thai sovereign's Long-Term Foreign-Currency IDR.
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