Bangkok--1 Sep--Moody's Investors
Moody's Investors Service has upgraded the standalone bank financial strength rating (BFSR) of Siam Commercial Bank Public Company Limited (SCB) to C- from D+.
The C- BFSR now maps to a Baa2 on Moody's long-term rating scale.
The outlook on the BFSR is stable.
At the same time, Moody's has affirmed SCB's Baa1/Prime-2 long-term foreign currency deposit and A3/Prime-2 foreign currency senior debt ratings.
In addition, Moody's has affirmed the (P) A3 rating of the notes issued under the bank's USD2.5 billion Euro Medium Term Note Programme.
RATINGS RATIONALE
"The upgrade of SCB's BFSR reflects the bank's achievements in growing its franchise, maintaining its leading position in consumer lending, and preserving its strong financial fundamentals, while successfully navigating through Thailand's political uncertainties and the global financial crisis over the past five years. Such accomplishments highlight the sustainability of the bank's business model," says Karolyn Seet, a Moody's Assistant Vice-President and lead analyst for the bank.
"The upgrade also demonstrates Moody's expectation that SCB's financial indicators will remain satisfactory in the medium term," says Seet. "In addition, its sound financial metrics -- with an adequate capital cushion and strong reserves -- further enhance its ratings."
Other factors that underpin SCB's ratings include (i) its solid corporate governance, credit underwriting standards and risk management procedures;
(ii) its strong franchise in its home market (especially as the dominant retail player in mortgages, credit cards, and bancassurance) with market shares of 15%, 15% and 16% in terms of assets, loans and deposits, respectively, and (iii) its steady overall fundamentals, which remain established within the "C-" regional peer group.
Even though SCB's Tier 1 ratio has declined to 10.7% -- according to its audited 2Q 2011 statements, and compared with 11% at end-2008 -- its regulatory and economic capitalization levels are still strong. These levels are sufficient to absorb expected medium-term credit losses under Moody's stress-test scenarios.
Moody's also notes that SCB has maintained a healthy financial performance over the past three years as it generates a stable flow of interest and commission income -- sufficient to cover operating expenses -- and solid loan-loss provision levels.
On a pre-provision basis, SCB's earnings generation compares favorably to similarly-rated Thai banks and its "C-" rated peers. Pre-provision profits were 3.8% of average risk weighted assets for 2010.
Moody's notes that SCB's asset quality has continued to improve over recent years. Non-performing loans (NPLs, defined as loans 90+ daysoverdue) declined to Bt36.6 billion (3.1% of gross loans) at end-June2011 from Bt 50.2 billion (5.5%) at end-2008, due to active debt management and minimal formation of new NPLs.
As with most other Thai banks, SCB's liquidity position is tightening, as evidenced by a 106% loan-to-deposit ratio at the end of 1H2011 (97% at end-2010). But, its sizable and stable core deposit base accounted for nearly 91% of its funding at end- 2010, with a profile mainly in local currency.
Looking ahead, however, the pricing of, and intense competition for funding will constrain the growth and profitability of the broader Thai banking sector, including SCB.
Against this backdrop, Moody's views SCB's risk appetite as relatively conservative, with a focus mainly on select borrowers with satisfactory credit standings. SCB maintains moderate single-borrower concentrations in its loan portfolio. But, the existing single-name and industry concentrations in its loan book also render the bank's performance particularly vulnerable to the performance of its largest borrowers. Its top 20 loan exposures range between 100% and 200% of its Tier I capital.
The stable rating outlook incorporates Moody's opinion that even if SCB's credit costs exceed Moody's expectations, its capital position should not deteriorate dramatically. The stable outlook should withstand expected pressures on asset quality and the expected effects of higher credit charges.
SCB's ratings have limited upside potential in the short term.
On the other hand the stable outlook on the ratings could change to negative if the (i) difficult operating environment in Thailand worsens and SCB's asset quality deteriorates in coming months; (ii) profitability declines, such that pre-provision profits -- as a percentage of risk-weighted assets -- fall below 2.5%; (iii) the loan-to-deposit ratio remains high at above 100%; and/or (iv) the bank's capital adequacy declines significantly, such that its Tier 1 ratio falls below 10%.
PRINCIPAL METHODOLOGIES
The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in Bangkok, Thailand, SCB reported unaudited total assets of Bt1,686 billion (US$56 billion) as of end-June 2011.