Bangkok--10 Jul--Fitch Ratings
Fitch Ratings has today affirmed the Support rating of Thai-based Bank for Agriculture and Agricultural Cooperatives (“BAAC”) at ‘2’. State support is vital for BAAC as it operates in the cyclical agricultural sector, and is subject to government directed, often non-commercial, lending policies. BAAC is also expanding its business scope to develop and lend to a broader section of the rural community, including other forms of cooperatives and small businesses. Given that Thailand’s Ministry of Finance (“MOF”) holds nearly all of BAAC’s issued shares, as well as its importance to the country’s rural sector, Fitch believes there is a high probability that state support would be forthcoming, if necessary. Any change in government ownership or support could impact the bank’s ratings.
In FY05/06 (year ending March 2006), BAAC’s net income improved to THB1.8 billion from THB1.6bn in FY04/05, largely due to loan growth and improved fee and foreign exchange income. The bank’s net interest margin also rose slightly to 5.38% in FY05/06 from 5.37% the prior year. BAAC’s pre-provisioning profit improved more sharply than its net profit as its loan loss provision increased significantly due to the bank’s three-year plan to strengthen its reserve position.
At end-March 2006, loans in arrears fell to THB23.5bn, or 5.6% of loans, from THB25.5bn, or 6.7% the prior year, as a result of debt restructuring. Nonetheless, BAAC reports loans in arrears only if they are more than one year overdue so as to reflect the seasonal nature of agricultural businesses. Therefore, the level of impaired loans on a stricter reporting basis may be significantly higher.
At end-March 2006, BAAC had THB45.3bn of general reserves and THB36bn of specific reserves, which equated to about 12.2% general reserve coverage and 73.9% specific reserve coverage against impaired loans. BAAC also has additional reserve of THB18.6bn for restructured loans. The agency notes that given its strong loan growth, policy role and volatility in the agricultural sector, asset quality risks remain a concern.
BAAC’s equity to asset ratio remains strong even though it fell to 9.2% at end-March 2006 from 10.4% at end-March 2005 due to high asset growth and dividend payment.
BAAC was established in 1966 with a main objective of providing financial assistance to farmers and agricultural cooperatives, in accordance with government policies. The BAAC Act gives the cabinet the power to appoint and remove directors on the recommendation of the MOF, establish rules for the execution of the bank’s policies and to supervise the general administration of the bank, including inspections, although this is now reviewed by the Bank of Thailand. In 2006, the Act was amended to allow BAAC to expand its financial assistance to non-agricultural sectors with limits. The MOF currently holds 99% of its issued shares, with agricultural cooperatives holding only a very small stake. BAAC has a large rural-based network of 600 branches
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.
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