Bangkok--11 Sep--Fitch Ratings
Fitch Ratings has today assigned an international Long-term foreign currency rating of ‘BBB-’ (‘BBB minus’) to Krung Thai Bank Public Company Limited’s (“KTB”) hybrid Tier 1 securities to be issued in the international markets. KTB’s hybrid Tier 1 securities are perpetual with a call option after 10 years from the issuance date, and are non-cumulative and able to absorb losses on a going-concern basis. According to the Bank of Thailand’s (“BOT”) regulations, the distribution of returns on hybrid Tier 1 securities may be made from profits or retained earnings. However, if a commercial bank has a non-profit year (after deducting interest payments on the hybrid Tier 1 securities), the distribution of returns can be made only if it is approved by the BOT on a case-by-case basis. The BOT will take into account the commercial bank’s financial strength such as Tier 1 capital, profitability and retained earnings.
At the same time, Fitch has affirmed KTB’s Long-term foreign currency Issuer Default rating (“IDR”) at ‘BBB+’ with a Stable Outlook, Short-term foreign currency rating at ‘F2’, foreign currency subordinated debt rating at ‘BBB’, Individual rating at ‘C/D’ and Support rating at ‘2’. The agency has also affirmed the bank’s National Long-term rating at ‘AA+(tha)’ with a Stable Outlook, National Short-term at ‘F1+(tha)’ and National subordinated debt rating at ‘AA(tha)’. Fitch notes that KTB’s senior ratings are underpinned by strong government ownership and support, as well as improving financial strength, although this support is less likely for more junior debt. While government ownership and control provide support to the senior debt ratings, these factors have tended to weaken KTB’s stand-alone financial performance. KTB is the second-largest Thai bank with an 18% market share with the central bank’s Financial Institutions Development Fund (“FIDF”) holding 56.1% of its shares. Government ownership will likely remain at least 51% for the foreseeable future.
KTB’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 KTB’s Long-term IDR of ‘BBB+’, the rating on KTB’s hybrid Tier 1 securities at ‘BBB-’ (BBB minus) has been rated two notches below its Long-term IDR. State support is less likely to be extended to the bank’s hybrid Tier 1 securities should there be any deterioration in the bank’s stand-alone financial strength. This implies some risk of a rapid and significant rating downgrade of the bank’s hybrid securities while the Long-term senior rating of the bank would likely remain unchanged on the back of government support. The notching difference between the bank’s Long-term IDR and the rating of its hybrid securities may, as a result, widen should that scenario take place.
Over the past two years, KTB’s underlying operating performance has improved significantly. In H106, net profit continued to improve to THB8.6bn from THB7.6bn in H105 mainly as a result of rising loan yields, improved fee income and higher gains on investments. These factors also helped the bank’s net interest margin improve to 3.9% on an annualised basis in H106 from 3.4% in 2005. While the operating environment for 2006 has deteriorated due to slower economic growth and political turmoil, KTB’s performance should generally remain stable provided the political issues are resolved and economic growth picks up in 2007 as the agency currently expects.
KTB's impaired loans fell to THB92.9bn (10.3%) at end-June 2006 from THB99.1bn (11.1%) at end-2005 on the back of further debt restructuring and write-offs, although reserve coverage still appears low at about 40%. A large loan re-classification ordered by the BOT in 2004 prompted KTB to review its risk-management systems. This also resulted in a management shake-up. Management is now focused on improving the bank’s culture and organisation to be more commercially-oriented, and on shifting its focus to retail banking, the benefits of which are likely to become more visible in the medium term. Mortgage and personal loans now account for about 16% of the bank’s loan book. At end-June 2006, KTB’s Tier 1 capital ratio stood at 8.3% of risk-weighted assets while total capital ratio stood at 11.8%. The bank reported retained earnings of THB23.7bn. Earnings recovery should help underpin capital adequacy.
Contacts: 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.
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