Bangkok--Oct 11--Fitch Ratings (Thailand)
Fitch Ratings-Bangkok/London-8 October 2004: Fitch Ratings (Thailand) has today assigned a National Long-term rating of ‘AA-(tha)’ (AA minus (tha)) to Krung Thai Bank Public Company Limited’s (“KTB”) subordinated debentures of up to THB10 billion with a maturity of 10 years. The Outlook on the rating is Stable. At the same time, Fitch Ratings, the international rating agency, has also affirmed KTB’s International senior debt ratings at Long-term ‘BBB-’ (BBB minus) Outlook Stable, Short-term ‘F3’, Individual ‘D’, Support ‘2’ and ‘BB+’ for its subordinated debt, as well as its National Long-term rating at ‘AA(tha)’ and Short-term at ‘F1+(tha)’. While government ownership and control provide support to the debt ratings, on a stand-alone basis these factors have tended to weaken KTB’s financial performance.
Although KTB’s underlying operating performance has improved over the past two years, challenges in re-establishing a viable business and restructuring its organisation still need to be more fully addressed. While partial privatisation of the bank has brought down the level of government ownership, the government continues to have a majority controlling stake. As a corollary of this, KTB’s financial performance will likely continue to be affected as it continues to support government policies, maintaining its role as the lead bank in supporting economic growth. Recent tougher regulatory action by the Bank of Thailand (“BOT”) including an order to reclassify a significant portion of KTB’s loan book appears aimed at improving credit risk management, accountability and disclosure at the bank. The central bank is also reviewing the reappointment of KTB’s senior management.
KTB’s results for 1H04 showed an improvement in profitability, with net profit rising to THB6.8bn from THB1.6bn in 1H03 due mainly to lower funding costs and one-off gains from dividend income from Vayupak Fund and debt restructuring. However, KTB’s 30% loan growth in both 2002 and 2003 and 24% annualised in 1H04, raises the risk of further asset quality deterioration and rising provisioning expenses which may impact this improving profitability trend.
After adjusting for the government bailout bonds, KTB’s impaired loans increased to 15.6% at end-June 2004 from 11.3% at end-2003 or by THB45bn (USD1.1bn) to THB129.2bn at end-June 2004 as a result of the more stringent loan classification criteria set by the BOT. About one third of the increased impaired loans are restructured loans while the remainder are general corporate loans. While the re-classification has not yet impacted KTB’s profitability, as approximately THB7bn of general reserves were transferred to specific reserves for the re-classified impaired loans, its reserve coverage ratio has now fallen to only 47.6% from 70.8% at end-2003, which appears relatively weak, indicating the risk of more provisions. If KTB were to rebuild its loss coverage ratio (other things being equal), this could see provisions exceeding expected pre-provision profit for 2004, resulting in a net loss. At end-June 2004, KTB’s Tier 1 Capital was 7.7% of risk-weighted assets while total capital ratio was 8.7%. While earnings recovery should provide some buffer, further large provisions and strong asset growth could place pressure on KTB’s capital adequacy over the next year.
While the large reclassification highlights Fitch’s concerns about KTB’s policy role, asset quality and risk management, the agency has affirmed the ratings on the basis that the impact on profitability and capital does not appear, as yet, to be significant, although some additional provisioning is likely. Also, KTB’s Long-term ratings are to some degree supported by majority government ownership. Fitch reiterates, however, that further asset quality deterioration could pose provisioning, profitability and capital risks, which could affect KTB’s Individual or stand-alone financial strength rating. Fitch views the BOT’s increased regulatory pressure on KTB to improve its loan classification criteria as a positive development for the sector, particularly given the systemic risks of state-owned banks’ aggressive policy lending over the past three years.
Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(tha)’ for National ratings in Thailand. Specific letter grades are not therefore internationally comparable. Fitch’s Individual ratings assess how a bank would be viewed if it were entirely independent and could not rely on external support. Its Support ratings deal with the question of whether a bank would receive support from its owners or from the state if it were to get into difficulty. These ratings are not debt ratings but rather, respectively, an assessment of the intrinsic strength of a bank and of any level of outside support that may, or may not, be available to it.
Contact: Chaiyapat Paitoon, Vincent Milton, Bangkok +662 655 4762/4759; David Marshall, Hong Kong +852 2263 9963 End.
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