KEY RATING DRIVERS
Shareholder Support Drives IDRs: UOBT's Long-Term IDR is driven by the bank's SSR, which in turn reflects Fitch's expectations of extraordinary support from its Singapore-based parent, United Overseas Bank Limited (UOB; AA-/Negative/aa-). UOBT's Short-Term IDR is assigned at the higher option of 'F1' to reflect that shareholder support propensity is more certain in the near-term.
UOBT's National Ratings considers its support-driven credit profile relative to other issuers on the national scale, with UOB's rating being multiple notches higher than Thailand's sovereign rating of 'BBB+'. UOBT's 'AAA(tha)' rating reflects the lowest expectation of default risk compared with other issuers in Thailand.
VR Reflects Moderate Market Position: UOBT's VR considers the bank's moderate presence as a mid-sized bank in Thailand, and its acceptable financial performance, despite the challenges of the Covid-19 pandemic. The acquisition of Citibank's retail assets in Thailand in November 2022 will increase the bank's business model diversity, but will also have a negative effect on its core capital levels and may be indicative of an increasing risk appetite.
Constrained by Country Ceiling: Thailand's Country Ceiling of 'A-' constrains UOBT's ability to receive support from UOB, and hence acts as a cap to the Thai subsidiary's SSR and Long-Term IDR.
Significant Linkages and Integration: UOBT is 99.7%-owned by UOB, with high levels of management control and operational integration. The subsidiary provides the group with a significant footprint in Thailand, the second-largest market in south-east Asia. UOBT's acquisition of Citibank's retail assets reflects the group's expansion strategy in Thailand, and will further boost the group's brand recognition in the Thai market.
Operating Environment Broadly Supportive: Fitch expects that improving GDP growth (4.0% in 2023, compared with 2.6% in 2022) will support Thai commercial banks' business prospects and growth. Nevertheless, business and household leverage in the economy has risen over the course of the pandemic - Fitch estimates private-sector credit to GDP at 155% in 2022 - which may lead to downside risks should economic prospects unexpectedly deteriorate.
Moderate but Growing Franchise: UOBT is the seventh-largest bank in Thailand, with a deposit market share of around 4%. UOBT's acquisition of Citibank's retail assets will help significantly grow its presence in unsecured retail lending (credit cards and personal loans), which will complement the bank's existing operations in mortgages and corporate lending. Nevertheless, we expect it will take time for the full operational integration of the new assets and for the realisation of cross-selling synergies.
Asset Quality Stabilising: UOBT's impaired-loan ratio was at 3.1% in June 2022, which was up slightly from the pre-pandemic level of 2.9% at end-2019. There remains some downside risks due to the presence of loans that were restructured under pandemic assistance programmes, similar to other banks in Thailand, as well as the increase in unsecured retail loans following the Citibank acquisition. Nevertheless, Fitch expects that the economic environment will be broadly supportive of performance and help mitigate significant downside risks.
Capital Affected by Transaction: Fitch has revised down the bank's capitalisation score to 'bbb-' after the acquisition of Citibank's retail assets, which will substantially affect UOBT's capital ratios from the December 2022 accounts. UOBT's common equity Tier 1 (CET1) ratio is likely to remain significantly below the Thai banking sector average (December 2022: 15.3%) over the medium term.
Fitch's assessment of UOBT's capitalisation also considers its position in the UOB group, and remains contingent on our view of the group's longer-term plans for managing the subsidiary's capital and loss absorption buffers.
Liquidity Benefits from Group Ties: UOBT's loan-to-deposit ratio was 92.2% in June 2022 (sector average 92.8% at end-2022), and Fitch does not expect the ratio to deteriorate after the Citibank transaction. The bank's funding and liquidity score of 'bbb+' also reflects that UOBT's liquidity position benefits from ongoing ordinary support from the parent, which includes access to interbank facilities and group relationships, and facilitates market access.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRs, SSR and National Ratings
UOBT's SSR and, hence, its Long-Term IDR, would be downgraded if there were major deterioration in the parent's ability or propensity to support the Thai subsidiary. For example, a multiple-notch downgrade of UOB's VR to or below Thailand's Country Ceiling of 'A-' could have a negative impact on UOBT's SSR, Long-Term IDR and National Ratings.
There could also be negative rating action on the IDRs, SSR and National Ratings from substantially reduced linkages between UOBT and UOB, which would mean a lower propensity of shareholder support. This may be indicated by a decline in UOB's shareholding in UOBT to below 75%, combined with reduced management control and a decline in strategic co-ordination with the parent. However, Fitch does not expect such changes in support propensity to occur in the medium term.
There would be downside to the Short-Term IDR if the bank's Long-Term IDR were to be downgraded to 'BBB'.
Any negative rating action on the National Ratings would also have to take into consideration the bank's profile relative to other issuers in Thailand.
VR
There may be downside to UOBT's VR from significant deterioration in key financial metrics beyond Fitch's expectations. For example, this may occur if UOBT's impaired-loan ratio were to stay above 4% (June 2022: 3.1%), combined with reduced buffers, such as the operating profit/risk-weighted assets ratio remaining at around 1.0%. Such an outcome would also likely indicate that synergy benefits from the Citibank acquisition have not materialised, and indicate reduced prospects for the bank's business profile.
The maintenance of inadequate core capital buffers, such as a CET1 ratio sustained below 11% -- well below the typical threshold - could also lead to a negative re-assessment of the VR. An increase in the perceived level of risk appetite and growth in riskier client segments could further weigh on our assessment of capitalisation and lead to a downgrade of the VR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDRs, SSR, and National Ratings
There is no upside to the bank's SSR or Long-Term IDR unless Thailand's Country Ceiling is revised upwards. There is no upside to the Short-Term IDR unless the bank's Long-Term IDR is upgraded to 'A'.
There is no upside to the National Long-Term Rating, which is at the top end of the scale.
VR
There may be upside to the VR from significant improvements in the bank's franchise that enhance competitiveness, enabling the bank to sustain a strong financial performance compared with peers. This may be indicated by the operating profit/risk-weighted asset ratio being sustained above 2.0%, and the impaired-loan ratio falling to below 3.0%, combined with acceptable loss-absorption buffers. However, even such improvements may not be sufficient for the VR to be upgraded should core capitalisation remain at levels below that of larger local peers.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
UOBT's senior debt is rated at the same level as the bank's National Long-Term Rating, to reflect the unsubordinated and unsecured nature of the obligations.
UOBT's Basel II Tier-2 compliant securities are rated two notches below the anchor rating, which is the bank's National Long-Term Rating. The notching reflects the notes' higher loss-severity risk relative to senior unsecured notes, due to the subordinated nature of the obligations. The notes do not incorporate going-concern loss absorption, and hence there is no additional notching for non-performance risk. The rating approach is consistent with the baseline notching in Fitch's rating criteria, and is in line with similar instruments rated by Fitch for other Thai-based banks.
UOBT's Thai-baht denominated Additional Tier 1 (AT1) notes are rated four notches below the bank's National Long-Term Rating. The notching is consistent with Fitch's approach for similar instruments that would be issued by the bank's parent, UOB, which, in turn, is in line with the baseline approach for these instruments in Fitch's criteria. UOBT's National Long-Term Rating reflects expectations of extraordinary support from UOB. Fitch uses UOBT's support-driven rating as anchor for the AT1 notes, rather than its standalone credit profile, because the agency expects that pre-emptive support from UOB would flow to the Thai subsidiary and partly mitigate non-performance risk on the instruments.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Any negative rating action on the bank's National Long-Term Rating would have a similar effect on the ratings of the bank's senior debt, Basel III Tier 2 notes, and AT1 notes. There is no rating upside to these debt instruments, as the anchor rating, the National Long-Term Rating, is already at the top end of the scale.
VR ADJUSTMENTS
The operating environment score has been assigned above the implied score due to the following reason: sovereign rating.
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
UOBT's ratings are driven by the ratings of its parent, UOB.
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