Bangkok--1 Nov--Fitch Ratings
Fitch Ratings has today assigned a National rating of ‘A+(tha)’ to Krung Thai Bank Public Company Limited’s (“KTB”) hybrid Tier 1 securities to be issued in the domestic market. These are non-cumulative, perpetual securities with a call option exercisable after 10 years from the issuance date, with the ability 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 in making its decision.
Fitch rates KTB as follows: Long-term foreign currency Issuer Default rating (“IDR”) ‘BBB+’ with a Stable Outlook, Short-term foreign currency rating ‘F2’, foreign currency subordinated debt rating ‘BBB’, foreign currency rating on offshore hybrid Tier 1 securities ‘BBB-’ (BBB minus), Individual rating ‘C/D’ and Support rating ‘2’, National Long-term rating ‘AA+(tha)’ with a Stable Outlook, National Short-term ‘F1+(tha)’ and National subordinated debt rating ‘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. The central bank’s Financial Institutions Development Fund (“FIDF”) holds 56.1% of its shares and 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. The ‘A+(tha)’ National rating on KTB’s hybrid Tier 1 securities is rated three notches below the bank’s ‘AA+(tha)’Long-term National rating, reflecting Fitch’s belief that state support is less likely to be extended to KTB’s hybrid Tier 1 securities in event of any deterioration in the bank’s stand-alone financial strength. In such a scenario, there is some risk of a rapid and significant rating downgrade of the bank’s hybrid securities, even as the Long-term senior rating of the bank remains unchanged on the prospect of government support, possibly resulting in a widening of the notching differential between the bank’s Long-term senior rating and the rating of its hybrid securities.
Over the past two years, KTB’s underlying operating performance has improved significantly. In the first nine months of 2006 (“9M06”), net profit continued to improve to THB13.7 billion from THB12.2bn in 9M05 mainly as a result of rising loan yields, improved fee income and higher gains on investments, although provisioning risks remain given its low reserve coverage. These factors also helped the bank’s net interest margin improve to 4% on an annualised basis in 9M06 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 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. An 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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