Fitch Affirms Krung Thai Bank at ‘BBB’; Outlook Stable

Bangkok--11 Nov--Fitch Ratings Fitch Ratings has affirmed Krung Thai Bank Public Company Limited’s (KTB) Long-Term Foreign Currency Issuer Default Rating (IDR) at ‘BBB’ with a Stable Outlook and Viability Rating at ‘bbb-’. A full rating breakdown is provided at the end of this release. KTB’s ratings are primarily based on government ownership, control and support. KTB is Thailand’s (Long-Term Foreign Currency IDR: ‘BBB’/Stable) second-largest bank with about 18% market share of loans and deposits. Its major shareholder is the Bank of Thailand’s (BOT) Financial Institutions Development Fund, with a 55% stake. Notwithstanding the current ownership stake, Fitch believes there is a high probability that KTB would receive state support if needed, due to its size and importance to the financial system and economy. In this regard, the bank has previously been used by the government to help implement public policy, more specifically, to extend loans in times of economic stress. A change in sovereign’s ratings could affect KTB’s Long- and Short-Term IDRs. However, consistent with many higher-rated jurisdictions where systemically important institutions (including those with partial policy functions) are less than 100% state-owned, KTB’s IDRs could decouple from the sovereign were the latter to be upgraded to the ‘A’ category. This is because of potentially less reliance on commercial institutions to support government policies. For the aforementioned reasons, plus the differences between the more granular national and international rating scales, KTB’s National Long-Term rating has been affirmed at ‘AA+(tha)’. The bank’s VR primarily reflects its significant domestic franchise while also taking into account its modest standalone financial position, which had been compromised by past government influence over lending and thus would be constrained if compelled by the government to support certain policies. However, KTB’s commercial strategy has contributed to recent improvements in its financial position. Any significant deterioration in KTB’s profitability, asset quality and capital could lead to negative rating action on the VR. KTB continued to report solid performance in 9M11, with net profit of THB16.2bn (up 42% yoy) and a return on assets of 1.2% (2010: 0.9%). However, the bank’s profitability and margins could weaken in Q411 and 2012 due to the impact from the severe flooding in Thailand. KTB is likely to face heightening asset quality pressure in 2012 and rising credit costs, given its low loan loss coverage ratio of below 60% and low excess reserves of THB3.1bn (0.2% of performing loans) at end-June 2011. Its 9M11 financial results have begun to see the evidence of the flood impact. Nonetheless, Fitch believes KTB’s overall improvement in profitability and strong capital should provide buffers against this short-term impact from the floods. KTB’s funding and liquidity remain stable as it has one of Thailand’s strongest deposit franchises domestically, with most state enterprises and government employees depositing their savings with the bank. The loan/deposit ratio was 101.5% at end-June 2011 (end-2010: 100.3%), although the ratio would decline to about 91% if bills of exchange (which are viewed locally as alternative to fixed deposits) were included. KTB’s adequate Tier 1 and total capital ratios of 9% and 14.1%, respectively, at end-September 2011 should provide reasonable buffer against unexpected economic shocks or slowdowns. KTB’s hybrid Tier 1 securities are currently rated two notches below its VR. As such, a change in KTB’s VR could lead to similar action on the hybrid capital instruments, although materially weaker capital, profitability and retained earnings could result in a wider notching for its hybrid securities, as these are key criteria for Bank of Thailand’s coupon payment approval, should the bank report a loss. KTB’s ratings have been affirmed as follows: - Long-Term Foreign Currency IDR at ‘BBB’; Outlook Stable - Short-Term Foreign Currency IDR at ‘F3’ - Viability Rating at ‘bbb-’ - Individual Rating at ‘C/D’ - Support Rating at ‘2’ - Foreign currency subordinated debt rating at ‘BBB-’ - Support Rating Floor at ‘BBB’ - Foreign currency offshore hybrid Tier 1 securities at ‘BB’ - National Long-Term rating at ‘AA+(tha)’; Outlook Stable - National Short-Term rating at ‘F1+(tha)’ - National subordinated debt rating at ‘AA(tha)’ - National rating on domestic hybrid Tier 1 securities at ‘A(tha)’ Contacts: Primary Analyst Patchara Sarayudh Associate Director +66 2655 4761 Fitch Ratings (Thailand) Limited Wave Place 13th Fl., Wireless Road, Lumpini, Patumwan Bangkok 10330 Secondary Analyst Narumol Charnchanavivat Director +66 2655 4763 Committee Chairperson Jonathan Cornish Managing Director +852 2263 9901