Bangkok--22 Aug--Moody's Asia Pacific
Moody's Investors Service has confirmed Siam Commercial Bank Public Company Limited's ("SCB") D+ bank financial
strength rating ("BFSR") and changed its outlook to positive from stable.
The bank's other ratings remain unchanged at Baa1 for senior debt and Baa1/Prime-2 for long-term/short-term foreign deposits. This action concludes the review of SCB's BFSR for possible upgrade announced March 28, 2006.
"The confirmation - rather than an upgrade, which had been originally considered due to various improvements - reflects Moody's concerns over SCB's rapid loan growth and expansion into lending for small- and medium-sized enterprises ("SME")," says Leo Wah, a Moody's Assistant Vice President/Analyst.
"Such issues could still pressure asset quality and margins in the near term, and in turn slow SCB's ability to achieve the strong financial fundamentals necessary to sustain a BFSR in the C- range in an emerging market like Thailand," adds Wah.
"But the new positive rating outlook indicates Moody's recognition of SCB's very successful expansion into consumer banking, improved risk management and our expectation that management will probably successfully negotiate the impediments to a higher BFSR," says Wah. "Furthermore, a larger exposure to SMEs could also lead to a more
balanced lending portfolio, supporting its development into a premier universal bank," adds Wah.
Led by a solid management, SCB has become a quality universal bank in terms of market presence, profitability and risk management. Its expansion into consumer lending, despite rising competition because of more players, has so far delivered satisfactory results because of a successful execution and its own solid capital base. The bank has achieved the critical mass which leads to a recovery in profitability.
Nonetheless, SME lending is still riskier - particularly in an economic slowdown - as it is not as diversified as individual lending and the borrowers usually have weaker balance sheets than those of large corporate lenders. SCB's risk profile may change, given that the operating environment in Thailand has been adversely affected by political uncertainties, interest rate hikes, and oil price fluctuations.
"SCB's relatively aggressive loan growth has engendered some concerns over its asset quality," says Wah, adding, "Following years of balance sheet expansion, its consequent level of liquidity may lead to higher funding costs, thus affecting profitability."
Moreover, deterioration in its reported non-performing loan ratio to double digits and in profitability to 2.5% or below, in terms of its risk-adjusted pre-provision profit ratio, could exert downward pressure on the BFSR. However, Moody's currently believes this last scenario unlikely as SCB's financials should not fluctuate substantially.
To consider a ratings upgrade, Moody's would need to see: 1) further improvement in risk management to cope with the expansion in riskier lending, such as activities in SME lending and unsecured individual credits; 2) a proactive adjustment in risk management amid economic volatility; 3) sustained or even improved profitability, in spite of possible increases in funding costs, bad debt provision charges and operating expenses; and 4) an operating environment which is relatively
stable.
Headquartered in Bangkok, SCB is Thailand's third largest bank, with total assets of Bt877 billion as of June 30, 2006.
The rating affected is:
Siam Commercial Bank Public Company Limited -- Bank financial strength rating of D+. The rating outlook is changed to positive.
The ratings not affected are:
Siam Commercial Bank Public Company Limited -- Foreign currency deposit ratings of Baa1 and Prime-2. The rating outlook is stable.
Siam Commercial Bank Public Co. (Singapore) -- Senior unsecured debt rating of Baa1. The rating outlook is stable.
Hong Kong
Leo Wah, CFA
Asst Vice President - Analyst
Financial Institutions Group
Moody's Asia Pacific Ltd.
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