Bangkok--4 Oct--Moody's
Moody's Investors Service has todaydowngraded the local currency deposit ratings of Krung Thai Bank PublicCompany Limited (KTB) to Baa1/Prime-2, negative outlook, from A3/Prime-1,stable outlook.
In addition, Moody's has changed the outlook on the foreign currencydeposit ratings of Baa1/Prime-2 to negative from stable.Krung Thai Bank Public Co. Ltd., Singapore Branch foreign currency hybrid issue of B2 (hyb) has been affirmed with a stable outlook.
Separately, Moody's has changed the outlook on the bank's standalone bankfinancial strength rating (BFSR) of D-, which maps to Ba3 on thelong-term scale, to positive from stable.
RATINGS RATIONALEDOWNGRADE OF LOCAL CURRENCY DEPOSIT RATINGS
The downgrade reflects a recalibration of the systemic support assumptions
that underpin Moody's ratings of KTB.
Even though KTB is still 55%-owned by the state (The Bank of Thailand'srescue arm, and the Financial Institution Development Fund), the bankincreasingly functions as a commercial bank, with no specific policymandates from the government, unlike other specialized financialinstitutions like the Government Housing Bank (Baa1, stable; E+/B1stable), Export-Import Bank of Thailand (Baa1 stable), Bank forAgriculture and Agricultural Cooperatives (unrated), Small and MediumEnterprise Development Bank (unrated), and the Government Savings Bank(unrated). As a result, Moody's decided that the six notches of ratingsuplift from its stand-alone Ba3 rating previously incorporated into KTB'slocal currency deposit ratings was excessive.
Nonetheless, KTB plays a key role in the country's payment system as itis the second-largest Thai bank with a nation-wide footprint, and had an18% share of assets, loans, and deposits at end-2010. As a result,Moody's believes that the Thai government will still have a strongincentive to assist KTB, if needed, given KTB's systemic importance. Itis therefore appropriate that the bank's ratings continue to benefit fromseveral notches of systemic uplift.
POSITIVE OUTLOOK ON BFSR
At the same time, Moody's notes that KTB's stand-alone financial profileis on an improving trend. As a result, the outlook on its stand-alonerating has been changed to positive. The main driver of an improvedfinancial profile is a strengthening of asset quality. Its non-performingloans (NPLs, defined as loans 90+ days overdue) declined to THB67.5billion (5.1% of gross loans) at end-June 2011 from THB85.9 billion(8.2%) at end-2008 due to active debt management and minimal formationof new NPLs.
Other aspects of the bank's financial profile show fewer clear-cut signsof improvement and generally lag KTB's major peers such as Bangkok Bank(Baa1 stable, C-/Baa2 stable), Siam Commercial Bank (Baa1 stable, C-/Baa2stable) and Kasikornbank (Baa1 stable, D+/Baa3 stable). KTB's Tier 1ratio declined to 8.5% at the end of June 2011 from 9.9% at the end of2010. This was due in part to the booking of one-time expenses related toIAS19 (employee benefits). Although KTB's Tier 1 is still more thandouble the central bank's requirement of 4.25%, its ability to absorbexpected medium-term credit losses under Moody's stress-test scenarios isweaker than its rated peers.
On a pre-provision basis, earnings generation compares unfavorably toother similar-sized Thai banks and its "D" rated peers. KTB'spre-provision profits were 2.3% of average risk weighted assets for 2010.
As with most other Thai banks, KTB's liquidity position is tightening, asevidenced by a 101% loan-to-deposit ratio at the end of 1H2011 (89% atend-2009). However, its sizable and stable core deposit base accountedfor nearly 80% of its funding at end- 2010, with a profile mainly inlocal currency.
Nonetheless, while such metrics justify a stand-alone rating below thatof its main peers, overall KTB's financial profile is comfortablerelative to its Ba3 unsupported rating, especially given the strength ofthe bank's franchise as the second largest bank in Thailand. An upgradecould be considered if KTB manages to further reduce its NPLs whilemaintaining its capital, earnings and liquidity profile at their currentlevel.
Specifically, An upgrade of the BFSR could follow if KTB sustains itstrack record of (i) reducing its NPL levels whereby the NPL ratiodeclines below 4%, while at the same time increasing its loan loss
reserves coverage to that comparable to its peers; (ii) increasing itscapital such that the Tier 1 ratio is above 9%; and (iii) furtherbroadening and diversifying both its funding base and revenue sources --
primarily its consumer and fee income.
NEGATIVE OUTLOOK ON DEPOSIT RATINGS
Even after the one-notch downgrade of the local currency deposit ratingto Baa1, KTB continues to benefit from 5-notches of ratings uplift onaccount of systemic support. Moody's will continue to review theappropriateness of such high ratings uplift in the context of the bank'srole as a commercial bank. However, given the positive outlook on thestand-alone rating, it is possible that improvements in the bank'sfinancial profile will help narrow the gap between the stand-alone andsupported rating. The extent to which these improvements willsufficiently offset further reduction in the support assumption will bethe main driver of the deposit rating. Within 12-18 months (the normaltime horizon for Moody's outlooks), Moody's anticipates that the depositratings will benefit from no more than 3-4 notches of uplift forsystemic support.
PRINCIPAL METHODOLOGIES
The 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 RefinedMethodology published in March 2007. Please see the Credit Policy pageon www.moodys.com for a copy of these methodologies.
Headquartered in Bangkok, Thailand, KTB reported total assets of THB1,849 billion (USD61 billion) as of end- June 2011.
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