Bangkok--14 May--Fitch Ratings
Fitch Ratings has revised the Outlook on TMB Bank Public Company Limited's (TMB) Long-Term Issuer Default Rating (IDR) and National Long-Term Rating to Stable from Positive and affirmed the ratings at 'BBB-' and at 'AA-(tha)', respectively. At the same time, Fitch has downgraded TMB's subordinated debt rating to 'A(tha)' from 'A+(tha)'. A full list of rating actions is included below.
The Outlook revision reflects TMB's challenging operating environment and the large-scale economic disruptions caused by the coronavirus pandemic, which significantly intensify the slowdown in Thailand's economy. Regulatory relief measures on loan classifications and debt restructuring may delay some of the impact on asset quality, but cannot fully eliminate the risks particularly for weaker and more vulnerable debtors. For more details on the operating environment, please see, "Coronavirus Increases Challenges for Thai Banks' Operating Environment", dated 2 April 2020, at https://www.fitchratings.com/site/pr/10116671.
The duration and trajectory of the coronavirus outbreak remains uncertain. However, key financial metrics for asset quality and earnings over the rating horizon of 18-24 months are likely to be significantly weaker than Fitch's earlier expectations.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
TMB's IDRs, National Ratings and senior debt ratings are driven by the bank's standalone profile, which Fitch captures in its Viability Rating (VR). The bank's 'BBB-' IDR is also currently at the same level as the Support Rating Floor (SRF), which implies that TMB's IDRs, National Ratings, and senior debt ratings could become driven by the SRF, should the 'bbb-' VR be downgraded, and as long as Fitch's view on the government's ability and propensity to provide extraordinary support to TMB remains unchanged.
TMB's National Ratings also take into account its credit profile strengths relative to other rated entities on Thailand's national rating scale.
The senior debt ratings are equalised with the Long-Term IDR as they represent unsecured and unsubordinated obligations of the bank.
VIABILITY RATING
TMB's VR takes into account the bank's moderately strengthened company profile after its merger with Thanachart Bank Public Company Limited. However, we believe the increasingly challenging operating environment will make it more difficult for TMB to yield meaningful improvements in its standalone financial strength in the near-to-medium term. This is contrary to our expectations prior to the coronavirus-led deterioration in the local operating environment. Moreover, the execution challenges of the merger could be exacerbated by the weak economy and rising pressure on asset quality and profitability.
TMB's asset quality and performance under Fitch's base-case scenario would be significantly affected over the next two years with weak core ratios relative to the current VR. Therefore, the outlook for its asset quality score of 'bbb-' is negative. Aside from rising credit costs, the bank's profitability will be pressured by the low interest-rate environment, and much weaker business activity. This prompted Fitch to lower the bank's score for earnings and profitability by one notch to 'bb+' from 'bbb-', with the potential for further downside subject to provisioning requirements and the pace of bad loan resolution. Fitch expects TMB's common equity Tier 1 (CET1) ratio of 13.6% at end-2019 to provide some buffer to the risks, aided by the bank's stock dividend plan and intention to deleverage, but risks also remain in line with the pressure we expect on asset quality and profitability. Funding and liquidity risks should be mitigated by TMB's much larger and more diversified deposit base post-merger and limited near-term foreign-currency funding requirements.
SUPPORT RATING AND SUPPORT RATING FLOOR
TMB's Support Rating (SR) and SRF are based on the bank's increased systemic importance after the merger with Thanachart Bank. TMB was the sixth-largest bank in Thailand with deposit market share of about 10% at end-2019. The deposit market shares of larger commercial banks in the Thai market range from 11% to 17%. Fitch believes there is a high probability of the government providing TMB with timely extraordinary support, if needed.
SUBORDINATED DEBT
TMB's Basel III Tier 2 subordinated Thai baht notes are now rated two notches below the VR-driven National Long-Term Rating, the anchor rating for these notes. This is consistent with Fitch's baseline notching approach for subordinated debt in our revised Bank Rating Criteria, as we believe the notes have a poorer recovery rate than senior unsecured instruments. A non-viability trigger was defined as emergency capital assistance from the central bank or any other empowered government agency. There is no additional notching for incremental non-performance risks, as the notes do not incorporate going-concern loss absorption such as coupon omission or deferral features.
RATING SENSITIVITIES
IDRs, NATIONAL RATINGS and SENIOR DEBT
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of either TMB's VR or SRF (see below) could lead to an upgrade of the bank's IDRs, National Ratings and senior debt.
Changes in Fitch's perception of TMB's credit profile relative to the national-rating universe in Thailand could also affect TMB's National Ratings. However, an upgrade of the National Ratings is not probable in the near term in light of the challenging operating outlook.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The downgrade of both the VR and SRF (see below) would lead to a downgrade of the IDRs, National Ratings and senior debt.
VIABILITY RATING
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The VR could be upgraded if Fitch sees greater evidence that TMB's domestic franchise has strengthened, its business model has improved and that these factors are likely to lead to sustained improvement in its overall financial strength to levels more comparable with that of higher rated domestic peers. However, this is unlikely to occur over the near term due to the strong headwinds in the operating environment and the risks to its key financial metrics, particularly asset quality and earnings, over the next two years.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The VR could be downgraded if TMB's key financial ratios were to deteriorate more than we expect in the weakening operating environment as a result of the coronavirus pandemic. This may be indicated by an impaired-loan ratio of above 6% (2.7% at end-2019), a loan-loss coverage ratio below 100% (120% at end-2019) and declining operating profit to risk-weighted assets of below 1% over the next two or more years (0.7% in 2019). Also, failure to maintain sufficient capital buffers against heightening risks, indicated by a CET1 ratio below 13%, could negatively affect the VR.
SUPPORT RATING AND SUPPORT RATING FLOOR
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The SRF could be upgraded if Fitch assesses that the state has greater ability or propensity to provide support to TMB. An upgrade of Thailand's Long-Term Foreign-Currency IDR of 'BBB+'/Stable may indicate the government's higher ability to support systemic important banks, including TMB, but any assessment on the SRF would also need to consider the state's relative propensity to support the bank.
The SR would not change unless the SRF is revised into a different category.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch may take negative action on TMB's SR and SRF if the government's ability to support the bank diminishes. This may happen if the agency downgrades Thailand's Long-Term Foreign-Currency IDR. Also, there may be negative rating action if there are any signs of a significant reduction in TMB's systemic importance or resolution legislation is introduced that renders the prospect of the government providing timely extraordinary support less likely than our current expectations.
SUBORDINATED DEBT
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the National Long-Term Rating due to an improving standalone financial profile is likely to lead to a similar rating action on TMB's Thai baht subordinated debentures.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of the VR to below the SRF of 'BBB-' could lead to a lower implied anchor rating on the national rating scale and a downgrade of the subordinated debenture unless we believe the government is more likely to mitigate the risk of non-performance.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions 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.
ESG CONSIDERATIONS
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Additional information is available on www.fitchratings.com