Fitch Ratings has upgraded Krung Thai Bank Public Company Limited's (KTB) Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'BBB' and the National Long-Term Rating to 'AAA(tha)' from 'AA+(tha)'. The Outlooks are Stable. As a result, KTB's Short-Term IDR, senior unsecured debt ratings and subordinated debt ratings have also been upgraded by one notch.
The rating actions reflect Fitch's reassessment of KTB's policy role, which we believe has become more prominent over the course of the coronavirus pandemic-related economic challenges in Thailand. This is in addition to KTB already being designated as a domestic systemically important bank (D-SIB).
Fitch is withdrawing KTB'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 KTB a Government Support Rating (GSR) of 'bbb+'.
A full list of rating actions is below.
KEY RATING DRIVERS
IDRs, NATIONAL RATINGS AND SENIOR DEBT
KTB's IDRs and National Ratings are driven by its GSR, which reflects Fitch's view on the government's ability and propensity to provide extraordinary support to KTB, if needed. Fitch rates the Thai sovereign at 'BBB+'/'F1' with a Stable Outlook.
The upgrade of the Short-Term IDR reflects the support-driven nature of the bank's Long-Term IDR and Fitch's view that support propensity is more certain in the near term, which leads to the higher option on the short-term ratings correspondence table of 'F1'.
KTB's National Ratings also take into account a comparison of the bank's credit profile relative to other entities rated on the Thai national scale. The upgrade of the National Long-Term Rating to 'AAA(tha)' is in line with Fitch's rating approach for other banks in Thailand that have a Long-Term IDR at 'BBB+'.
KTB's senior debt represents the bank's unsecured and unsubordinated obligations, and is equalised with its Long-Term IDR and the National Ratings.
GOVERNMENT SUPPORT RATING
KTB's GSR reflects Fitch's stronger belief that the government has a high propensity to provide extraordinary support to KTB, if needed. Fitch views KTB as systemically important to the domestic financial system, with a deposit market share of around 16% and a designation by the Bank of Thailand as one of the country's six D-SIBs.
Aside from systemic importance, Fitch believes that KTB is also strategically important to the government as it is the only commercial bank majority-owned by the state. A unit of the Bank of Thailand owns 55% of KTB, and Fitch believes that the state's shareholding in the bank is long term and strategic.
KTB has played a more direct and active role in supporting government policies compared with private-sector commercial banks. The bank has been a key distributor of the government's stimulus and relief packages via its mobile applications and branch network. KTB's loan growth of 12% in 2020 and 10% in 9M21 is significantly higher than sector averages of 6% and 4%, respectively, and has been driven by loans to government entities to support the state's pandemic response. Fitch expects that KTB's linkages with the state reflect its important role in the financial system.
The GSR also takes into account the Thai government's ability to support banks, which is indicated by the sovereign's Long-Term IDR. Fitch believes that sovereign financial flexibility, relative to the rating level, remains high with adequate fiscal headroom to support the banks, if necessary, even though government debt levels have risen. The government's actions during the pandemic to support financial system stability, such as through the central bank's regulatory measures, also suggest that state propensity to support the banks is strong.
VIABILITY RATING
KTB's Viability Rating (VR) of 'bbb-', which reflects its standalone credit strength, takes into account the challenging conditions in Thailand, with the operating environment (OE) assessed as '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.
We believe the sovereign's support for financial market stability and solid economic growth contributes to the 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.
KTB's VR also reflects its business profile as one of the largest banks in Thailand, combined with a moderate financial profile. KTB's business profile score of 'bbb' reflects the bank's scale and its diverse range of clients as part of its universal banking operations, while also reflecting significant competitive pressures in many segments. The score also reflects KTB's benefits from its close relationship with government-related entities and its position as the government's main cash management bank, which ensures stable and sustainable business flow.
KTB's risk profile score of 'bbb-' reflects the bank's less consistent record in underwriting and risk controls compared with the large Thai bank peers, while also taking into account some improvement in credit processes, particularly on the retail portfolio.
KTB's impaired loans ratio has improved over the past two years, reflecting high loan growth and regulatory relief measures. Even so, the ratio of 4.3% as of end-9M21 remains higher than the sector average of 3.8% and KTB's asset quality score (bb+) takes into account the risk of some further deterioration.
Fitch believes the regulatory relief measures and lenience on loan classifications are delaying the full effect of the pandemic on Thai banks' financial accounts, and that delinquencies across the sector, and at KTB, will rise in 2022. Nevertheless, KTB's loan-loss absorption buffers have improved in recent years, providing some support to potential increases in impaired loans - the bank's loan-loss allowance coverage had improved to 157.2% of impaired loans by end-9M21 (2020: 140.5%).
KTB's subdued profitability is also likely to remain under pressure in the near term, amid a gradual economic recovery, challenges in increasing non-interest income and compression of interest margins. Fitch expects that credit costs will decline, but will remain high against pre-pandemic levels and continue to constrain profitability. There also remains downside risk to earnings should the recovery be delayed. Hence, KTB's implied earnings and profitability score is at the lower end of the 'bbb' category (assigned score is bb+), and generally reflects less stable profitability relative to large domestic peers.
KTB's loans/deposit ratio has risen to 99.9% as of end-9M21, but Fitch expects that the bank's funding profile will remain sound. The bank's deposit franchise is supported by its close relationship to state-related entities, and a high portion of relatively stable transactional current and saving accounts (end-9M21: 82% of total deposits). We expect KTB's long-standing government linkages will continue to contribute to its low-cost funding and accommodate its liquidity position in the long term.
SUBORDINATED DEBT
KTB's Basel lll Tier 2 subordinated Thai-baht denominated notes are rated two notches below the National Long-Term Rating, in line with Fitch's baseline approach in our criteria to rating similar subordinated debt instruments.
The use of the support-driven National Rating as the anchor rating reflects Fitch's expectation that state would provide support to KTB before the point of non-viability. The notching reflects loss severity compared to senior notes. There is also no notching for non-performance risk, as the notes do not incorporate going-concern loss absorption, such as coupon omission or deferral features.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDR, NATIONAL RATINGS AND SENIOR DEBT
Negative rating action on KTB's GSR would most likely lead to similar action on KTB's IDRs, National Long-Term Rating and senior debt rating. The National Long-Term Rating of KTB would also take into account any weakening, on a relative basis, in the national-rating universe of rated entities in Thailand.
VIABILITY RATING
KTB's VR could be downgraded if the bank's financial performance were to worsen significantly more than we expect, as may be reflected by downward pressure on multiple rating factors, including the OE score. This may arise through a weaker economic recovery than Fitch expects, and the bank's market position failing to yield the level of expected financial performance given our assessment of the OE. For example, such stress may be reflected in a decline in risk buffers, such as a decline in the common equity Tier 1 ratio below 13% for a sustained period (9M21: 15.5%), combined with a loan-loss coverage ratio of below 100%. An increase in risk-taking at the bank, as reflected in changes in its risk profile score, that leads to the prospect of significantly weaker through-the-cycle asset quality and earnings capacity could also be negative factors for the rating.
GOVERNMENT SUPPORT RATING
There could be negative rating action on the GSR if the government's ability to provide support declines, which could be evident from a downgrade of Thailand's Long-Term Foreign-Currency IDR.
KTB's GSR could also be downgraded if there was a decline in the government's propensity to support the bank. For example, this may arise from a sharp decline in its systemic importance, along with a substantial decline in the level of government linkages. However, Fitch views any decline in support propensity as unlikely in the near term.
SUBORDINATED DEBT
A downgrade of National Long-Term Rating would lead to a downgrade of the subordinated debt.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDR, NATIONAL RATINGS AND SENIOR DEBT
KTB's Long-Term IDR and senior debt rating could be upgraded as a result of positive rating action on the GSR.
There is no upside for the National Ratings of KTB, which are at the highest end of the scale.
VIABILITY RATING
An upgrade would be likely from a sustained improvement in the bank's asset quality and earnings, such as an impaired loans ratio of below 3.5% (end-9M21: 4.3%) while maintaining a stable or reduced risk appetite, along with a higher operating profit/risk-weighted assets ratio of above 2% (end-9M21: 1.5%), combined with maintenance of sound capital buffers relative to the industry average.
GOVERNMENT SUPPORT RATING
KTB's GSR is equalised with the Thai sovereign rating, and hence there may be positive rating action only if there is a similar action on Thailand's Long-Term Foreign-Currency IDR, which would indicate the government's higher ability to support KTB. However, any such assessment would also have to take into consideration whether Fitch's other assumptions about support propensity remain unchanged at the sovereign's higher rating level.
SUBORDINATED DEBT
There is no upside for the rating on KTB's Thai baht subordinated debt instruments, as the anchor rating, the National Long-Term Rating, is at the highest point in the scale.
VR ADJUSTMENTS
The OE score of 'bbb' has been assigned above the 'bb' category implied score on the following adjustment reason: sovereign rating (positive).
The earnings and profitability score of 'bb+' has been assigned below the 'bbb' category implied score on the following adjustment reason: earnings stability (negative).
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
KTB's GSR, IDRs and National Ratings are linked to Thailand's sovereign ratings.
ESG CONSIDERATIONS
KTB has an ESG Relevance Score of '4' for Governance Structure due to the potentially significant influence of the state on the bank's strategic objectives and risk governance that could weaken the protection of creditor and stakeholder rights. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. The bank's strong state linkages are also factored into our assessment of the likelihood of state support, which drives its GSR and Long-Term IDR.
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