KEY RATING DRIVERS
IDRs and VR
Ratings Equalised with Core Bank: SCBX's IDRs and VR are based on the standalone credit profile of the group, as reflected by the VR of the core operating entity, The Siam Commercial Bank Public Company Limited (SCB, BBB/Stable/bbb). SCBX's VR is equalised with the group's VR. We expect that SCBX will maintain a low double leverage ratio of below 110% over the medium term. In addition, the holding company is regulated by the Bank of Thailand, and has to comply with Basel III capital and liquidity ratios, and we expect liquidity management to be broadly prudent and resilient to stress scenarios.
Bank Subsidiary Remains Largest Entity: We expect that SCB will remain the largest part of the group in the near to medium term, and that the risk of failure of SCB and of the holding company would be substantially the same. SCBX's ratings are also underpinned by a high level of integration with SCB, as reflected by near full ownership (99.06%) of the bank and similar name and branding.
SCBX's Short-Term IDR of 'F3' is at the lower option that maps to its Long-Term IDR, as our assessment of the group's funding and liquidity profile does not meet the criteria requirements for a higher rating.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRs and VR
SCBX's Long-Term IDR and VR are sensitive to any changes in our assessment of the group's standalone credit profile, which is indicated by the VR of its core bank, SCB. Therefore, a negative rating action on SCB's VR would be likely to lead to a similar rating action on SCBX's ratings.
A material decline in SCB's contribution to the group's consolidated credit profile could lead to a reassessment of notching approach between SCBX and the core operating bank, SCB. For example, a fall in SCB's contribution to the group in terms of asset size to below 75% for a sustained period may indicate rising exposure from non-bank businesses and would be likely to lead to a re-assessment of the holding company rating approach, as this may challenge whether the risk of failure of the bank and of the holding company remains aligned.
An increase in the double leverage ratio to above 120% or a significant weakening in SCBX's liquidity management policy, both on consolidated and standalone level, could also lead to a wider notching differential between the VRs of SCBX and SCB.
SCBX's Short-Term IDR could be downgraded to 'B' if its Long-Term IDR were to be downgraded below 'BBB-'.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDRs and VR
An upgrade in SCB's VR could lead to similar action on SCBX's Long-Term IDR and VR. Without the upgrade of SCB's VR, there should be no further rating upside because SCBX's assigned rating is already at the same level with SCB's rating.
GSR
Group's Systemic Importance: SCBX's GSR is based on the group's systemic importance to the domestic financial system, which is underpinned by the group's (via SCB) deposit market share of around 15%. The Bank of Thailand regulates SCBX and SCB on a group basis, and SCBX is also subject to the same domestic systemically important bank (D-SIB) buffers as SCB. The GSR also takes into account the Thai government's (BBB+/Stable) ability to support banks, which is indicated by the sovereign Long-Term IDR.
SCBX's GSR is one notch lower than that of SCB, reflecting Fitch's view that government support could be prioritised to SCB due to its more critical functions within the financial system as a deposit taker and financial transactions provider.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
There could be negative action on the GSR if the government's 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's propensity to provide support to SCBX and/or SCB has diminished, for example through a large decline in the group's level of systemic importance; or if the non-bank businesses expand significantly and alter the shape of the group; or if significant regulatory changes lower the government's support propensity to support SCBX relative to SCB. However, we believe these scenarios are unlikely to occur over the medium term.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
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 D-SIBs and financial institutions. Any upward revision of the GSR would also need to take into consideration whether the government's propensity to support banks remains intact.
There could also be upside to SCBX's GSR if Fitch assesses that regulatory actions towards SCB and SCBX in a resolution scenario would not be significantly different. This may, for example, be indicated by an increase in SCBX's own level of systemic importance even when not including SCB.
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
DATE OF RELEVANT COMMITTEE
11 August 2022
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
SCBX's IDRs and VR are linked to SCB's VR. SCBX's GSR is linked to Thailand's sovereign rating.
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