Fitch Ratings has affirmed Bangkok Bank Public Company Limited's (BBL) Long-Term Issuer Default Rating (IDR) at 'BBB' and National Long-Term Rating at 'AA+(tha)'. The Outlooks are Stable.
Fitch is withdrawing BBL'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 BBL a Government Support Rating (GSR) of 'bbb'.
A full list of rating actions is below.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
The IDRs, National Ratings and ratings on the senior debt are driven by both the GSR and the standalone strength, which is denoted by the Viability Rating (VR). BBL's National Ratings also take into account a comparison of the bank's credit profile relative to that of other entities rated on the Thai national scale.
The senior debt represents the bank's unsecured and unsubordinated obligation, and is rated at the same level as the bank's Long-Term IDR.
VIABILITY RATING
BBL'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 '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 Thai banks' ability to operate profitably and sustainably. Fitch expects the economic conditions to improve in 2022, forecasting Thai GDP to grow by 4.8%, which will support the banks' performance.
BBL's VR also reflects its business profile and competitive position as one of the leading commercial banks in Thailand. This is reflected in BBL's business profile score of 'bbb+', which is underpinned by an established franchise, consistent business execution and diversified client base that creates business opportunities and the capacity to generate earnings.
BBL is also the only Thai bank with a substantial international presence, which supports its strong presence in corporate banking. The strength in corporate lending contributes to our assessment of its risk profile (bbb), which reflects the overall appetite for risk being at a similar level to large peers and the OE.
BBL's asset quality score of 'bbb-' with a negative outlook takes into consideration the increase in the impaired loans ratio from pre-Covid 19 pandemic levels (4.4% at end-9M21) and our expectation that it will rise further in the coming year. Still, the bank has a very high level of reserve coverage, maintaining a loan-loss allowance coverage ratio of 190% (well above the sector average of 150% as of end-9M21). This provides an important loss absorption buffer against further deterioration in delinquencies.
BBL's earnings and profitability score of 'bbb-' with a negative outlook reflects Fitch's view that the implied score could move to the 'bb' category in the next few years. The operating profit/risk-weighted assets (RWA) ratio has recovered slightly from 2020, but remains weak at 1.2% as of end-9M21. BBL's earnings could be squeezed by the low interest rate environment, a slow economic recovery and credit costs.
BBL's core capital ratios have declined since the acquisition of Indonesia's Bank Permata Tbk in May 2020, with the common equity Tier 1 (CET1) ratio at 15.3% as of end-9M21. Even so, BBL has a history of conservative capital management and has typically maintained core capital above sector averages. We assess its capitalisation and leverage score at 'bbb+' because Fitch expects that over the medium term, the bank will rebuild its CET1 ratio to be above peers through internal capital generation. Moreover, BBL adopts conservative risk-weighting via the standardised approach, in a similar way to peers.
BBL's funding and liquidity (bbb+) is supported by a sound domestic deposit franchise, and the bank has benefited from strong deposit inflows during the pandemic-related market volatility. The bank's loans/deposit ratio is consistently lower than peers, and was 81.0% as of end-9M21, against the sector average of 94.1%. BBL also maintains high holdings of liquid assets, with a liquidity coverage ratio of 283% in 2Q21.
GOVERNMENT SUPPORT RATING
Fitch assesses BBL'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. BBL has a long history as one of Thailand's largest banks, with a deposit market share of about 18%. BBL 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.
SUBORDINATED DEBT
BBL's Tier 2 subordinated notes are rated two notches below the anchor rating - the VR - to reflect the loss severity risk of the instruments. There is no additional notching for non-performance risk due to the absence of going-concern loss-absorption features. The notching and issuance rating are in line with Fitch's approach in the criteria to rating similar subordinated debt instruments.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Concurrent negative action on BBL's GSR and VR would lead to similar action on the bank's Long-Term IDR, National Long-Term Rating and senior debt rating. BBL's National Rating could also be downgraded to 'AA(tha)' if, in our 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 BBL'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, 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 support BBL diminished, for example, through a large decline in the bank's level of systemic importance or significant regulatory changes. However, we believe there is little prospect of a weaker propensity to support BBL over the medium term.
SUBORDINATED DEBT
A downgrade of BBL's VR would lead to a downgrade of the subordinated debt.
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 BBL's IDRs, National Ratings and senior debt ratings following similar changes in either its VR or GSR. The National Ratings of BBL would also take into account the bank's relative creditworthiness compared with peers rated on the national scale.
VIABILITY RATING
BBL'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 maintaining an impaired loans ratio of less than 3% and an operating profit/RWA ratio of above 2.5% (9M21: 1.2%), combined with the maintenance of key buffers, such as a CET1 ratio of above 16%.
GOVERNMENT SUPPORT RATING
There may be positive 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 BBL. Any upward revision of the GSR would also need to consider whether the propensity to support banks remains intact. It is unlikely that there would be positive action on BBL's GSR if the sovereign rating remained unchanged.
SUBORDINATED DEBT
BBL's subordinated debt instruments would be upgraded if the anchor rating - the Viability Rating - was upgraded.
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 asset quality score of 'bbb-' has been assigned above the 'bb' category implied score on the following adjustment reason: collateral and reserves (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
BBL'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