Bangkok--29 Jan--Fitch Ratings
Fitch Ratings has today downgraded TMB Bank’s (“TMB”) foreign currency hybrid Tier 1 rating to ‘B’ from ‘B+’ and revised the Outlook on TMB’s Long-term foreign currency Issuer Default rating (“IDR”) to Stable from Positive. The agency has affirmed the Long-term foreign currency IDR at ‘BB+’, Short-term foreign currency rating at ‘B’, foreign currency subordinated debt rating at ‘BB’, Individual rating at ‘D’ and Support rating at ‘3’. At the same time, Fitch Ratings (Thailand) has also revised the Outlook on TMB’s National Long-term rating to Stable from Positive, and affirmed the National Long-term rating at ‘A(tha)’, National Short-term rating at ‘F1(tha)’and National subordinated debt rating at ‘A-(tha)’ (A minus (tha)).
The downgrade of the bank’s hybrid Tier 1 securities rating reflects the heightened risks of non-payment of interest on the bank’s hybrid Tier 1 securities following the recently reported net loss of THB12.3bn in 2006 given TMB’s poor profitability, weak asset quality and additional provisioning risk that could further impact capital. A non-payment will depend in part on how stringently the BOT decides to interpret the regulations governing hybrid instruments, which is based on the BOT’s assessment of the bank’s stability, such as the level of capital funds, profitability, or the level of retained earnings. At end-2006, TMB’s Tier 1 capital ratio fell to 7.3% from 10% at end-September 2006. The bank’s retained losses are estimated to have increased to about THB55bn at end-2006 from THB43.2bn at end-September 2006. Even if the bank were to raise new equity in 2007 and to reorganize its capital it is unlikely these retained losses could be eliminated.
Fitch’s Outlook revision on the bank follows a review of the expected improvement from TMB’s strategic tie-up with Singapore’s DBS Bank (rated ‘AA-’ (AA minus)/Stable/‘F1+’) which has yet to yield any material improvement in the bank’s financial performance, operations or franchise, which remain poor. In addition, the merger with the Industrial Finance Corporation of Thailand continues to be an ongoing drag on TMB’s performance while the weakening operating environment in 2007 is likely to further impede an improvement in the bank’s profitability and asset quality.
The large loss reported for 2006 was due mainly to a substantial increase in provisions due to tighter provisioning rules following the implementation of new International Accounting Standard No.39 (“IAS39”) as well as the recognition of possible losses from dispute of pledged machinery with the Thai Asset Management Corporation (“TAMC”) and losses arising from the gain/loss sharing scheme with the TAMC. The new rules affected TMB to a greater extent than most other Thai banks given its lower level of loan loss reserves.
Stripping out the impact of the new IAS39 rule and non-recurring losses relating to the TAMC, TMB’s pre-provisioning income would have still declined significantly in 2006 due to negative loan growth, higher funding costs and higher operating expenses. While TMB has made large provisions to meet the BOT’s IAS39 first-phase requirement in H206, further provisioning risks remain in 2007 due to further implementation of IAS39 and asset quality pressures, which could see the bank’s profitability and capital deteriorate further. The bank has announced plans to raise a large amount of capital in 2007, but given the poor market sentiment this could be challenging. Nonetheless, the Ministry of Finance (“MOF”), which currently holds a 31% stake in TMB, is likely to provide support. The bank’s long historical affiliation with the Thai military might be expected to enhance potential support from Thailand’s current government but in Fitch’s view could also add political complexity to any decision to use public funds to support the bank. If successful, a large capital raising would help stabilise the bank’s Tier 1 hybrid rating and the bank’s overall financial strength.
Contacts: Chaiyapat Paitoon, Vincent Milton, Bangkok +662 655 4762/4759
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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