Fitch Ratings has affirmed The Siam Commercial Bank Public Company Limited's (SCB) Long-Term Issuer Default Rating (IDR) at 'BBB' and National Long-Term Rating at 'AA+(tha)'. The Outlooks are Stable.
Fitch is withdrawing SCB's Support Rating and Support Rating Floor as they are no longer relevant to the agency's coverage following the publication of our updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned SCB a Government Support Rating (GSR) of 'bbb'.
A full list of rating actions is below.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
SCB's IDRs and National Ratings are underpinned by both its GSR, as well as the bank's standalone profile as denoted by the Viability Rating (VR) of 'bbb'. The National Ratings also take into account a comparison of the bank's credit profile relative to other entities rated on the Thai national scale.
SCB's senior debt represents the bank's unsecured and unsubordinated obligations, and is equalised with the Long-Term IDR and the National Ratings.
VIABILITY RATING:
SCB's VR takes into account the challenging conditions in Thailand, with the operating environment (OE) being assessed at 'bbb'. The implied OE score for Thai banks under Fitch's criteria is in the 'bb' category, but Fitch applies a positive adjustment based on Thailand's sovereign rating (BBB+/Stable). We believe the sovereign's support for financial market stability and solid economic growth contributes to banks' ability to operate profitably and sustainably. Fitch expects the environment to improve in 2022, forecasting Thai GDP to grow by 4.8%, which will support the banks' financial performance.
SCB's VR also reflects its business profile and competitive position as one of the leading commercial banks in Thailand. SCB operates as a universal bank with strong market positions in various financial products, such as retail lending, transactional banking and corporate banking. This is reflected in SCB's business profile score of 'bbb+', which indicates that the bank's robust domestic market position creates business opportunities and the capacity to generate earnings.
SCB's risk profile (bbb) and the OE have manifested in rising strategic challenges, particularly in terms of earnings growth, and has led the SCB group to pursue a restructuring into a holding company (for details, please refer to Thailand's Siam Commercial Bank Reorganisation Reflects Industry's Rising Complexity, dated 24 September 2021).
Asset quality (bbb-) is likely to remain under pressure, with Fitch expecting SCB's impaired loans to rise as loan classification forbearance and regulatory relief measures expire. Hence, the outlook on the factor score is negative.
Even so, the risks are mitigated by the bank's loss absorption buffers, such as loan-loss allowance coverage (9M21: 132%) on top of collateral cover. The bank's impaired loans ratio has already risen over the past two years from Covid-19 pandemic-related pressures (9M21: 4.7%, from 4.0% at end-2019), and Fitch expects further gradual increases. Recent loan growth has been modest (0.8% in 9M21), denoting a more cautious approach during a challenging period.
Fitch believes SCB's earnings and profitability (bbb-) bottomed out in 2020. Its operating profit/risk-weighted assets (RWA) ratio had risen to 2.1% by end-9M21 (2020:1.5%), on lower provisions and a recovery in earnings, and we expect the trend to continue in 2022 on stronger business activity. Still, profitability will remain constrained by high credit costs and some margin pressures from the low interest rate environment.
The VR takes into account a potential decline in the bank's common equity Tier 1 (CET1) ratio to about 15% (9M21: 17.3%), after the SCB group's planned restructuring is completed in 2Q22. We assess SCB's capitalisation and leverage score at 'bbb+', as we expect the bank to maintain the ratio above 15% (consistent with the implied 'bbb' category score), and at a level comparable with Thai peers over the longer term. Our assessment also considers the CET 1 ratio being calculated under the standardised approach and a high tangible common equity/tangible assets ratio of around 12%.
SCB's funding and liquidity (bbb) remains supported by a robust retail client base and a high portion of transactional current and savings accounts, which comprise 79% of total deposits at end-9M21.
GOVERNMENT SUPPORT RATING
Fitch assesses SCB's GSR based on our perception of the bank's systemic importance to the domestic financial system, which leads to a high propensity of government support. SCB has a long history as one of Thailand's largest banks, with a sustainable deposit market share of around 15%. The bank is designated as one of the country's six domestic systemically important banks by the Bank of Thailand, reflecting its scale and financial system linkages. The GSR also takes into account the Thai government's ability to support banks, which is indicated by the sovereign Long-Term IDR.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Concurrent negative action on SCB's GSR and VR would lead to similar action on the bank's Long-Term IDR, National Long-Term Rating and senior debt rating. SCB's National Rating could also be downgraded to 'AA(tha)' if, in Fitch's opinion, its credit profile weakens on a relative basis in the national-rating universe of rated entities in Thailand.
VIABILITY RATING:
The VR could be downgraded to 'bbb-' if SCB's financial position deteriorates more than we expect, as may be reflected by downward pressure on multiple rating factors, including the OE score. This may arise from a much weaker economic recovery than Fitch expects, the bank's market position failing to yield the level of expected financial performance given our assessment of the OE, and/or higher appetite for risk without adequate mitigation. For example, such stresses may be indicated by an impaired loans ratio of above 6% for a sustained period (9M21: 4.7%), combined with weaker loss absorption buffers, such as a CET1 ratio of below 13% and a loan-loss coverage ratio of below 120%, and/or not sustaining an operating profit/RWA ratio above 1.5%.
GOVERNMENT SUPPORT RATING
There could be negative action on the GSR if the government's ability to provide support declines, which could be evidenced by a downgrade of Thailand's Long-Term Foreign-Currency IDR. There may also be negative rating action if Fitch believes that the government's propensity to provide support to SCB diminished, for example, through a large decline in the bank's level of systemic importance or significant regulatory changes. However, we believe there is limited prospect of a weaker government propensity to support SCB over the medium term.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDRS, NATIONAL RATINGS AND SENIOR DEBT
There could be positive rating action on SCB's IDRs, National Ratings and senior debt ratings following similar changes in either its GSR or VR. The National Ratings of SCB also take into account the relative creditworthiness of peers rated on the national scale.
VIABILITY RATING:
SCB's VR could be upgraded to 'bbb+' if key metrics improved to levels that were more consistent with those of peers in similarly rated OEs. This may be via a business profile that leads to consistently better-than-sector financial performance, aided by a stronger OE, and may be evidenced in sustained improvement in key financial ratios, such as an operating profit/RWA ratio above 2.5% (9M21: 2.1%) and an impaired loans ratio of less than 3% (9M21: 4.7%), combined with the maintenance of key buffers, such as a CET1 ratio of above 16%.
GOVERNMENT SUPPORT RATING
There may be positive rating action on the GSR if there was a similar action on Thailand's Long-Term Foreign-Currency IDR, which would indicate the government's higher ability to support systemically important banks such as SCB. Any upward revision of the GSR would also need to consider whether the government's propensity to support banks remains intact. It is unlikely that there would be further positive action on SCB's GSR if the sovereign rating remained unchanged.
VR ADJUSTMENTS
The OE score of 'bbb' has been assigned above the 'bb' category implied score on the following adjustment reason: sovereign rating (positive).
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond 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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
SCB's GSR is linked to the Thai sovereign's Long-Term Foreign-Currency IDR.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Additional information is available on www.fitchratings.com