Bangkok--8 May--Fitch Ratings
Fitch Ratings today assigned an international Long-term debt rating of ‘B+’ to TMB Bank’s (“TMB”) Hybrid Tier 1 securities. TMB’s hybrid Tier 1 securities are perpetual with a call option after 10 years from the issuance date. Also, the bank’s hybrid Tier 1 securities are non-cumulative and able to absorb losses on a going-concern basis. If the bank does not make net profit, it has the option not to pay interest on its hybrid securities. Hybrid may account for 15% of total Tier 1 capital, under the Bank of Thailand’s February 2006 notification.
In March 2006, Fitch affirmed TMB’s Long-term Foreign Currency Issuer Default Rating at ‘BB+’ with a Positive Outlook, Short-term foreign currency rating at ‘B’, foreign currency subordinated debt rating at ‘BB’, Individual rating at ‘D’ and Support rating at ‘3’ following the bank’s announcement of a planned THB12 billion rights issue and a THB8bn hybrid capital issue, which, if successfully completed, should help strengthen its financial position. TMB’s ratings remain constrained by its currently low level of reserves and capital and weak profitability and franchise relative to its larger peers. TMB’s planned capital increase and the support of its 16.1% strategic shareholder, Development Bank of Singapore (“DBS”, rated ‘AA-’ (AA minus)/Stable/‘F1+’), should help strengthen the bank in the medium term, notwithstanding a weakening operating environment in 2006.
According to Fitch’s notching guidelines, if the senior Long-term IDR is below ‘BBB-’ (BBB minus), the hybrid instrument will be notched down at least twice, but the differential may widen for lower ratings. TMB’s hybrid Tier 1 securities are subordinated to the bank’s deposits and other senior and subordinated liabilities except those liabilities which by their terms rank equal with or junior to the securities. Given TMB’s IDR of ‘BB+’ and Individual rating of ‘D’, the rating on TMB’s hybrid Tier 1 securities has been rated three notches below its IDR at ‘B+’.
TMB’s underlying profitability and capital position remains relatively weak when compared with other Thai banks. In 2005, its asset quality and reserve coverage deteriorated while its cost to income ratio still remains high, trends which were accentuated by the merger with the Industrial Finance Corporation of Thailand (“IFCT”). The weakening operating environment in 2006 may also affect the bank’s loan growth and profitability in 2006.
Underlying operating revenues are recovering, although profitability is still below the peer average, with a net interest margin of only 2.12% in 2005, reflecting the higher funding costs of IFCT and still-weak underlying loan growth. Net income improved to THB7.8bn in 2005 - mainly because of lower provisioning. The refinancing of IFCT’s higher cost wholesale funding, together with the strengthening of the bank’s franchise should result in higher revenues and improved profitability in the medium term. In Q106, net income rose marginally to THB2.13bn, although margin improvement could be constrained by rising funding costs.
At end-2005, TMB reported impaired loans of THB77.4bn, or about 14% of total loans, up from THB66.4bn (or 13%) at end-2004, due mainly to the reclassification of restructured loans in H105. Loan loss reserves stood at THB35bn, which equated to 45 % of impaired loans. Relatively weak reserve coverage and the high level of restructured loans still presents some risk of further provisioning. TMB’s net impaired loans/equity stood at 83% at end-2005, underlining its weak capital position. At end-2005, TMB’s Tier 1 capital stood at 6.2% of risk-weighted assets (“RWA”) and total capital was 9% of RWA. These ratios remain weaker than those of TMB’s peers, although the planned capital increase should help the bank fund growth and improve reserve coverage.
Contact: Chaiyapat Paitoon; Vincent Milton, Bangkok +662 655 4759/4762; David Marshall, Hong Kong +852 2263 9963
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