Bangkok--May 9--Fitch Ratings
Fitch Ratings (Thailand) 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 THB15 billion with a maturity of 10 years. The Outlook on the rating is Stable. At the same time, Fitch has also affirmed KTB’s National Long-term senior debt rating at ‘AA(tha)’ and Short term at ‘F1+(tha)’.
KTB’s ratings reflect the improvement in its financial position, although challenges in re-establishing a viable business, reforming its organisation and aggressive loan growth - which raises concerns about future asset quality problems and profitability - continue to constrain the ratings. Although government ownership and control provide support to the ratings, on a standalone basis, these factors have tended to weaken KTB’s financial performance. While the large loan reclassification in the first half of 2004 highlights Fitch’s concerns about KTB’s policy role, asset quality and risk management, the impact on profitability and capital does not, as yet, appear significant.
KTB reported a net profit of THB11.1bn in 2004, up from THB8.7bn in 2003 due largely to one-off dividends from the Vayupak Fund - the Thai government-initiated fund - strong loan growth, lower funding costs and higher gains from investments. Nonetheless, profitability was hurt by additional provisioning for the large increase in impaired loans. As a result of regulatory intervention, the aggressive loan growth of 30% per annum seen in 2002 and 2003, now appears to have moderated (15% in 2004).
KTB’s net interest margin improved to 2.87% in 2004 from 2.16% the prior year, due mainly to loan growth. Margins were also boosted by the restatement of penalty fees as interest income rather than non-interest, from the second quarter of 2004. In first quarter of 2005, KTB reported a net profit of THB4.3bn, which, while lower than the THB5.2bn reported in the first quarter of 2004 (due mainly to smaller gains from investments and higher income tax expenses) still shows underlying recovery is on track. The bank’s performance should continue to improve in 2005 with stronger earnings and lower provisioning, although loan growth is expected to moderate further given Thailand’s weakening economic growth outlook.
Adjusting for the government bail-out bonds, KTB’s impaired loans increased to THB123.3bn or 14.5% of total loans at end-2004 from THB82.9bn or 11.2% at end-2003 as a result of the more stringent loan classification criteria set by the Bank of Thailand. While the re-classification had no immediate impact on KTB’s profitability, as some of general reserves were transferred to specific reserves, its reserve coverage ratio has now fallen to only 51.4% from 71.8% at end-2003, which appears relatively weak, indicating the risk of more provisions. The bank is implementing improvements to risk management including general provisioning policy, which should address some of these concerns. At end-2004, KTB’s Tier 1 capital ratio stood at around 8.2% of risk-weighted assets while the total capital ratio stood at 10.9%. Earnings recovery should underpin capital adequacy, although if strong asset growth continues this could put pressure on capital adequacy over the next two years.
Contact: Chaiyapat Paitoon, Vincent Milton, Bangkok +662 655 4762/4759; David Marshall, Hong Kong +852 2263 9963
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. End.