Fitch has affirmed Bank of Ayudhya Public Company Limited's (BAY) Long-Term Issuer Default Rating (IDR) at 'BBB+' and National Long-Term Rating at 'AAA(tha)'. The Outlook is Stable. The ratings are driven by Fitch's expectations of extraordinary support from Japan-based MUFG Bank, Ltd. (A-/Stable).
Fitch is withdrawing BAY's Support Rating as it is 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 BAY a Shareholder Support Rating (SSR) of 'bbb+'. Fitch has also affirmed the bank's Viability Rating, which reflects its standalone credit profile, at 'bbb'.
KEY RATING DRIVERS
SSR, IDRS, NATIONAL RATINGS, SENIOR DEBT RATINGS
The SSR, IDRs and National Ratings reflect Fitch's view that BAY is a strategically important subsidiary of MUFG. MUFG owns 76.9% of BAY and controls the subsidiary's management and board of directors. BAY is one of the parent's largest overseas subsidiaries, and provides a full range of banking products and services in Thailand; a key market for Japanese investment in the region. BAY's expertise in retail banking also supports the group's operations in other southeast Asian countries, with the bank recently investing in financial institutions in Vietnam and the Philippines.
MUFG has been adding layers of integration and strategic co-ordination with BAY since the acquisition in 2013. The parent also provides product knowledge, risk management processes and significant funding lines to support BAY's lending to the group's multi-national clients.
Aside from these support considerations, BAY's National Ratings also reflect Fitch's view of the bank's relative credit profile on the Thai national scale and is consistent with Fitch's approach for other support-driven entities with parents that are higher-rated than the Thai sovereign (BBB+/Stable).
BAY's senior debt ratings are at the same level as the bank's National Long-Term Rating, reflecting the unsubordinated and unsecured nature of the obligations.
VIABILITY RATING
BAY's Viability Rating takes into account the challenging operating conditions in Thailand, with the operating environment being assessed at 'bbb'. The implied operating environment score for Thai banks under Fitch's criteria is 'bb', but Fitch applies a positive adjustment based on the sovereign rating. We believe sovereign support of financial market stability and the country's solid economic growth helps banks operate profitably and sustainably. We expect the environment to improve in 2022 and forecast GDP growth of 4.8%.
The Viability Rating also reflects BAY's business profile, which we score at 'bbb', and sound franchise as one of Thailand's six domestic systemically important banks. The bank operates as a universal bank serving a broad range of client segments, although it is particularly competitive in consumer finance, which made up 48% of total lending as of 3Q21, and multinational corporates (13%). We believe BAY has the scale and competitive position to operate profitably through the business cycle. The bank's risk profile score of 'bbb' reflects its consistent underwriting, risk controls and low-risk multi-national corporate portfolio.
The asset quality score of 'bbb' takes into account upcoming pressure. The impaired loan ratio rose to 2.71% in 3Q21, from 2.27% at end-2019, and Fitch expects further gradual increases once regulatory forbearance on loan classifications for clients affected by the Covid-19 pandemic ends. Nevertheless, the bank has increased provisioning since 2020, and current loan loss allowances coverage of 164% provides a reasonable loss absorption buffer.
BAY's bottom-line performance in 9M21 was boosted by extraordinary gains from a divestment of a microfinance subsidiary, without which net profit would have contracted slightly. Nevertheless, operating profit/risk-weighted assets, which excludes the extraordinary gains, was 1.8% as of 9M21, showing some resilience to the weak economic conditions. The earnings and profitability score of 'bbb-' reflects Fitch's expectations that BAY will maintain a reasonable financial performance over the next 18 months, although a return to pre-pandemic profitability levels is likely to be hampered by the continued low-interest rate environment, limited loan growth, and only a gradual recovery.
SUBORDINATED DEBT
BAY's Basel III Tier 2 subordinated Thai-baht denominated notes are rated two notches below the bank's National Long-Term Rating, in line with the base case in Fitch's criteria. The two notches account for the difference in loss severity compared with senior notes. There is no additional notching for non-performance risk, as the notes do not incorporate going-concern loss absorption. The use of the support-driven National Rating as the anchor reflects Fitch's view that MUFG would provide support to BAY prior to the point of non-viability.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
SSR, IDRS, NATIONAL RATINGS, SENIOR DEBT RATINGS
A decline in Fitch's assumptions of support from MUFG could lead to negative rating action.
MUFG's ability to support BAY is reflected in its Long-Term IDR, and negative rating action on MUFG would most likely lead to similar action on BAY's SSR, Long-Term IDR, and National Long-Term Rating.
A reduction in MUFG's propensity to support BAY would also be negative for the bank's ratings. This may be seen from a decline in MUFG's shareholding to below 75%, combined with reduced control, synergies, and operational integration. However, Fitch does not expect a change in support propensity to occur in the near term.
An assessment of the impact to BAY's National Ratings would also take into account relativities on the national rating scale with similarly rated peers.
BAY's senior debt ratings would move in line with its National Long-Term Rating.
VIABILITY RATING
The Viability Rating could be downgraded to 'bbb-' if BAY's financial position deteriorates more than we expect, as may be reflected by downward pressure on multiple financial factors, including the operating environment score. This may arise from an economic recovery that is weaker than we expect, the bank's market position failing to yield our expected level of financial performance or a higher appetite for risk without adequate mitigation. Such stress may be indicated by an impaired loan ratio of above 6.0% (3Q21: 2.7%) for a sustained period, combined with weaker loss absorption buffers, such as the common equity Tier 1 ratio at below 13.0% (3Q21: 15.6%) and the loan loss coverage ratio below 120% (3Q21: 164%) and/or not sustaining operating profit/risk-weighted assets at above 1.5% (3Q21: 1.8%).
SUBORDINATED DEBT
A downgrade of BAY's National Long-Term Rating would lead to a downgrade of its subordinated debt.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
SSR, IDRS, NATIONAL RATINGS, SENIOR DEBT RATINGS
There could be positive rating action on the SSR and Long-Term IDR if Fitch believes there is an improved ability or propensity of MUFG to support BAY. An upgrade of MUFG's Long-Term IDR would most likely lead to similar rating action on BAY's SSR and Long-Term IDR, as long as underlying assumptions on support propensity are unchanged.
There is no upside to the National Ratings or senior debt ratings, as they are at the top end of the scale.
VIABILITY RATING
There could be upside to the Viability Rating if the bank's franchise is further enhanced, leading to improved competitiveness and sustained improvement in financial metrics, aided by a stronger operating environment. This may be indicated by an operating profit/risk-weighted assets ratio of above 2.5%, while the bank maintains its moderate risk appetite, combined with a continued build-up of capital buffers, with the common-equity Tier 1 ratio at above 16%.
SUBORDINATED DEBT
There is no upside to BAY's subordinated debt instruments, because the anchor rating, the National Long-Term Rating, is at the top end of the scale.
VR ADJUSTMENTS
The operating environment score of 'bbb' has been assigned above the 'bb' category implied score due 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
The IDRs, SSR and National Ratings are linked to the credit profile of MUFG.
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