Bangkok--13 Feb--Fitch Ratings
Fitch Ratings has affirmed Bank of Ayudhya Public Company Limited’s (BAY) Long-Term Issuer Default Rating (IDR) at ‘A-’ and its National Long-Term Rating at ‘AAA(tha)’. The Outlook is Stable. At the same time, Fitch has also affirmed the bank’s Viability Rating (VR) at 'bbb'. A full list of rating actions is provided at the end of this commentary.
KEY RATING DRIVERS
BAY’s IDRs and National Ratings reflect Fitch’s belief there would be an extremely high probability of extraordinary support from its institutional shareholder, Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU, A/Stable), if needed. This is based on BAY’s strategic importance to its parent, BTMU’s majority ownership and effective control, and an expectation of increased integration after BAY combines with BTMU’s Bangkok Branch by end-2014.
The Stable Outlook on BAY’s Long-Term IDR is consistent with that of its parent.
BAY’s VR reflects its satisfactory performance, moderate capitalisation and improved asset quality. The rating also takes into account a potential significant increase in asset size, strengthening local franchise and a more diversified business model after the integration of BTMU’s Bangkok branch. While BAY will likely remain the fifth-largest bank by asset size in Thailand, its market share could increase to about 10% from 7% at end-September 2013. Its loan portfolio would also be more diversified, with corporates, SMEs and retail customers accounting for about 40%, 20%, and 40% of total loans, respectively (end-2013: 26%, 24% and 50%).
Fitch believes there is downside risk from a weakening operating environment and higher private sector leverage. As a result BAY’s profitability and asset quality could weaken. However, Fitch still expects BAY’s solid loan loss coverage ratio of 141% at end-2013 and consolidated Tier 1 capital of 11% at end-1H13 to provide acceptable buffers.
The bank’s funding and liquidity profile could remain relatively weaker than major local peers, with its greater reliance on wholesale funding, higher loan-to-deposit ratio and lower liquidity buffer. However, Fitch believes that BAY could rely on funding support from BTMU to mitigate the risks.
RATING SENSITIVITIES
Upgrades of the Long-Term IDR and National Long-Term Rating are unlikely given BAY’s IDR is currently at the Country Ceiling of ‘A-’, while its National Long-Term Rating is the highest on the national scale. A negative rating action on BTMU’s IDRs would lead to similar rating action on BAY’s IDRs, Support Rating and National Long-Term Rating. A negative rating action could occur if there is a material reduction in BTMU’s shareholding in or in its propensity to provide support to BAY.
Given downward pressure in the current operating environment, it is unlikely that BAY's VR will be upgraded in the near- to medium term. In the medium-term, the integration with BTMU may lead to improvement in the company's profile. Together with the maintenance of the bank’s strong profitability and asset quality measures, and the sustained improvement in capitalization and funding, this could potentially result in an upgrade of VR.
A downgrade in the VR could result from a significant erosion of capital, an increasing risk of significant deterioration in asset quality or weaker funding and liquidity profile.
BAY is Thailand's fifth-largest commercial bank by assets. Its ultimate parent, Mitsubishi UFJ Financial Group, BTMU’s single parent, is the largest financial group in Japan by assets with the most extensive overseas network.
The rating actions are as follows:
- Long-Term IDR affirmed at ‘A-’; Outlook Stable
- Short-Term IDR affirmed at ‘F2’
- Viability Rating affirmed at ‘bbb’
- Support Rating affirmed at ‘1’
- National Long-Term Rating affirmed at ‘AAA(tha)’; Outlook Stable
- National Short-Term Rating affirmed at ‘F1+(tha)’
- National long-term senior unsecured debt affirmed at ‘AAA(tha)’
- National short-term senior unsecured debt affirmed at ‘F1+(tha)’
- Legacy Basel II subordinated debt affirmed at ‘AA+(tha)’