Bangkok--1 Sep--Fitch Ratings Fitch Ratings has today affirmed Krung Thai Bank Public Company Limited’s (KTB) ratings, as follows:Long-term foreign currency Issuer Default Rating (IDR) at ‘BBB+’ with a Stable Outlook, Short-term foreign currency IDR at ‘F2’, Individual ‘C/D’, Support ‘2’, foreign currency subordinated debt rating ‘BBB’, foreign currency offshore hybrid Tier 1 securities ‘BBB-’ (BBB minus), National Long-term ‘AA+(tha)’ with Stable Outlook, National Short-term at ‘F1+(tha)’, National subordinated debt rating ‘AA(tha)’ and National rating on domestic hybrid Tier 1 securities at ‘A+(tha)’. In addition, the Support Rating Floor has been revised to ‘BBB+’ from ‘BBB’, to be in line with the Long-term foreign currency IDR, which is based on the high probability that KTB would receive state support if needed. KTB’s ratings are underpinned by strong government ownership and support, as well as improving financial strength; KTB is the second-largest Thai bank with a 17% market share, with the Bank of Thailand’s (BOT) Financial Institutions Development Fund (FIDF) holding a 55% stake. Although government ownership and control provide support to the long-term debt ratings, these factors could weaken KTB’s stand-alone financial performance. While KTB’s financial performance has improved in 2008 due to lower provisioning and a pick-up in loan growth, the outlook remains challenging due to the volatile economic and political environment. After poor results in 2007 due to weak loan growth and higher provisioning to comply with BOT’s stricter accounting rules, KTB’s performance showed improvement in underlying performance in H108. The bank reported net profit of THB6.2bn (2007 net profit was THB6.4bn), up 27% yoy largely driven by lower provisions and lower funding costs. A pick-up in loan growth and lower funding cost helped maintain NIM at about 3.6% in H108, although higher funding costs could cause margins to decline in H208. Also, while KTB has set aside large provisions for the last two years and an additional provision of THB4.5bn in H108, KTB’s loss coverage ratio of 42% still appears low compared with the peer group average of about 70%, implying further provisioning risks. However, further losses on CDO investments should be limited following THB4bn in write-downs and reserves on its original investment of THB5.4bn. Fitch notes that a further slowdown in the economy could cause renewed asset quality pressure. KTB’s impaired loans rose slightly to THB99bn or about 9.5% of loans at end-June 2008, which is higher than the system average of about 7%. KTB’s Tier 1 capital and total capital at 10.4% and 14.7%, respectively, at end-June 2008, provides a buffer against further credit losses. The implementation of Basel II, at end-2008, could also result in capital falling by about 100 bps due to new operational risk charges. Any change in Thailand’s sovereign ratings may impact KTB’s Long-term and Short-term ratings as government ownership and control underpin these ratings. The hybrid Tier 1 ratings partly reflect support from majority government ownership but are influenced more by KTB’s financial strength based on the bank’s positive retained earnings, strong capital and underlying profitability, notwithstanding the provisioning risks. State support is less likely to be extended to the bank’s hybrid securities should there be any major deterioration in the bank’s stand-alone financial strength. This implies some risk of a ratings downgrade of the bank’s hybrid securities while the senior ratings of the bank would likely remain unchanged on the back of government support. The notching difference between the bank’s Long-term senior ratings and its hybrid securities may, as a result, widen should that scenario take place.