Fitch Ratings has affirmed KASIKORNBANK Public Company Limited's (KBank) Long-Term Issuer Default Rating (IDR) at 'BBB' and National Long-Term Rating at 'AA+(tha)'. The Outlook is Stable.
Fitch is withdrawing KBank'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 KBank a Government Support Rating (GSR) of 'bbb'.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
KBank's IDRs and National Ratings are underpinned by the bank's GSR and standalone profile, as denoted by its Viability Rating. 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.
KBank's senior debt represents the bank's unsecured and unsubordinated obligations, and the rating on the debt is equalised with its Long-Term IDR and National Ratings.
KBank's Viability Rating takes into account the challenging conditions in Thailand, with the operating environment 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 Thailand's sovereign rating (BBB+/Stable). We believe sovereign support for financial market stability and the country's solid economic growth helps banks operate profitably and sustainably. Fitch expects economic conditions to improve in 2022 and forecasts GDP growth of 4.8%.
The Viability Rating also reflects KBank's business profile and competitive position as one of Thailand's leading commercial banks. KBank operates as a universal bank, with strong market positions in various segments, such as SME, digital and transactional banking. This is reflected in KBank's business profile score of 'bbb+', which indicates that the bank's robust domestic market position should support ongoing business opportunities and earnings generating capacity. The bank's risk profile score of 'bbb' reflects an overall risk appetite that is similar to large-bank peers, notwithstanding its exposure to SME lending, which has led to higher delinquencies during the current downturn. This exposure is mitigated by collateralisation and pre-emptive provisioning. Nevertheless, we have a negative outlook on KBank's risk profile, taking into account further downside risks to the SME portfolio and substantial loan growth over the past year.
The asset quality score of 'bbb-' with a negative outlook incorporates our expectation of greater asset-quality pressure as Covid-19 pandemic-related regulatory relief measures unwind and our forecast of the impaired loans ratio rising further from 4.4% as of September 2021. However, KBank has solid reserve coverage of impaired loans, at 135% as of September 2021, and a high level of loan collateralisation, particularly in the SME segment. We expect the bank to increase its loss allowances buffer during more benign operating conditions over the medium term. Nevertheless, KBank's rapid loan growth could add to asset-quality downside, particularly if economic growth is weaker than we anticipate. We expect the bank's credit costs to remain elevated into 2022, but our base case sees earnings as sufficient to absorb these costs while maintaining sound levels of profitability.
KBank's earnings and profitability score of 'bbb-' incorporate our expectation of some earnings improvement, albeit at a gradual pace. The operating profit/risk-weighted assets ratio rose to 2.0% in 9M21, from 1.7% in 2020, but remains below pre-pandemic levels. KBank's higher-yielding client segments lessen net interest margin compression compared with peers, but this is balanced by continued credit cost requirements and the sustained low interest-rate environment that reduces the possibility of margin upside.
KBank's common equity Tier 1 (CET1) ratio, which stood at 15.5% as of 9M21, is sound and in line with the peer-bank average. We assess the bank's capitalisation and leverage score at 'bbb+', as we expect the bank to maintain the CET1 ratio at a level that is consistent with an implied 'bbb' category score for capitalisation and comparable with Thai peers over the longer term. Our assessment also considers the CET1 ratio being calculated under the standardised approach and the bank's high tangible common equity/tangible equity ratio of around 12%.
KBank's funding and liquidity score of 'bbb' is supported by its stable retail client base, popular mobile application and a high portion of transactional current and savings accounts, which comprised 81% of total deposits at end-9M21.
We assess KBank's GSR based on our perception of the bank's systemic importance to the domestic financial system, which leads to a high propensity for the government to provide support. KBank has a long history as one of Thailand's largest banks, with a sustainable deposit market share in the range of 14%-15%. It 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 government's ability to support banks, as indicated by the sovereign Long-Term IDR.
KBank's Basel III Tier 2 subordinated notes, which have been issued internationally and domestically, are rated two notches below their respective international and domestic scale anchor ratings to reflect loss severity risk. On the international scale, the anchor rating is the Viability Rating, and on the national scale, the anchor rating is the National Long-Term Rating. There is no additional notching for non-performance risk due to the absence of going-concern loss-absorption features. The notching is in line with Fitch's approach in the criteria to rating similar subordinated debt instruments.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Concurrent negative action on KBank's GSR and Viability Rating would lead to similar action on the Long-Term IDR, National Long-Term Rating and senior debt rating. KBank'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.
The Viability Rating could be downgraded to 'bbb-' if KBank's financial position deteriorates by more than we expect. This may be reflected by downward pressure on multiple rating factors, including the operating environment score, and may arise from an economic recovery that is much weaker than we expect, the bank's market position failing to yield our forecast 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% for a sustained period (9M21: 4.4%), combined with weaker loss absorption buffers, such as a CET1 ratio of below 13.0% (9M21: 15.5%), and a loan-loss coverage ratio of below 120.0% (9M21: 134.5%) and/or not sustaining an operating profit/risk-weighted assets ratio of above 1.5% (9M21: 2.0%).
There could be negative action on the GSR if the government's ability to provide support declines, which could be evidenced by the agency downgrading Thailand's Long-Term Foreign-Currency IDR. There may also be negative rating action if Fitch believes that the government's propensity to support KBank has diminished, such as 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 KBank over the medium term.
A downgrade of the anchor rating 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 KBank's IDRs, National Ratings and senior debt ratings following similar changes in either its GSR or Viability Rating. The National Ratings of KBank also take into account the relative creditworthiness of peers rated on the national scale.
The Viability Rating could be upgraded to 'bbb+' if key metrics improve to levels that are more consistent with those of peers in similar operating environments. This may be via a business profile that leads to consistently above-sector financial performance, aided by a stronger operating environment, and may be evidenced by a sustained improvement in key financial metrics, such as a higher operating profit/risk weighted asset ratio of above 2.5%, an impaired-loan ratio of less than 3.0% and a CET1 ratio of above 16%.
There may be positive rating action on the GSR if there is 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 KBank. 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 positive action on KBank's GSR if the sovereign rating remained unchanged.
KBank's subordinated debt instruments would be upgraded if the Viability Rating is upgraded.
The operating environment score of 'bbb' has been assigned above the 'bb' category implied score due the following adjustment reason: sovereign rating (positive).
The asset quality score of 'bbb-' has been assigned above the 'bb' category implied score due to 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
KBank's GSR is linked to the Thai sovereign's 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