Bangkok--27 Mar--Fitch Ratings
Fitch Ratings has today downgraded Krung Thai Bank Public Company Limited's (KTB) foreign currency hybrid Tier 1 securities rating to 'BB+' from 'BBB-' (BBB minus) and downgraded KTB's National hybrid Tier 1 rating to 'A(tha)' from 'A+(tha)'. At the same time, the agency has affirmed KTB's Long-term foreign currency Issuer Default Rating (IDR) at 'BBB+' with a Negative Outlook, Short-term foreign currency IDR at 'F2', foreign currency subordinated debt rating at 'BBB', Individual Rating at 'C/D', Support Rating at '2', and Support Rating Floor at 'BBB+'. The agency has also affirmed the bank's National Long-term Rating at 'AA+(tha)' with a Stable Outlook, National Short-term rating at 'F1+(tha)' and National subordinated debt rating at 'AA(tha)'.
The downgrade of KTB's hybrid Tier 1 rating reflects the heightened risk of coupon non-payment due to the sharp deterioration in the operating environment; Fitch forecasts Thailand's GDP will contract 3.8% in 2009. According to Bank of Thailand (BoT) regulations, coupons on hybrid Tier 1 securities may be paid from profits or retained earnings. However, if a bank reports a loss, the coupons can only be paid if payment is approved by the BoT on a case-by-case basis. The BoT will take into account a commercial bank's financial strength, such as capital, profitability and retained earnings, in making its decision. Given KTB has positive retained earnings of THB37.2bn even if it reported a loss, the BoT could still permit KTB to pay the coupon, although given the potential for significant weakening in profitability and capital in the next two years, Fitch believes risks of non-payment have risen.
KTB's ratings are underpinned by strong government ownership and support and its improving financial strength. KTB is Thailand's second-largest bank with a 16% market share, the BoT's Financial Institutions Development Fund (FIDF) holds a 55% stake. Given KTB's size and importance to the financial system and economy, as well as its majority state-ownership and control, the agency believes there is a high probability that KTB would receive state support, if needed, although this support may not extend to more junior debt such as hybrid securities.
KTB reported an improved performance for 2008 with a net profit of THB12.3bn, double the previous year, due mainly to lower provisions despite mark-to-market CDO losses of THB2.4bn. A pick-up in loan growth (9.2% y-o-y) and the lower cost of deposits helped maintain KTB's net interest margin (NIM) at about 3.6% in 2008. KTB's performance in 2009 will likely weaken due to margin pressure from a fall in loan growth. In addition, renewed asset quality pressure could result in significant increases in provisioning costs, as the bank's loan loss coverage ratio is still low at about 41% of NPLs. Although KTB's liquidity ratios are relatively weak compared with Thailand's three largest private banks, strong government support should mitigate these risks.
KTB's impaired loans declined to THB86bn (8.3% of loans) at end-2008 from THB96.8bn (10.1% of loans) at end-2007 due to write-offs and debt restructuring although NPLs are expected to rise in 2009. Current Tier 1 and total capital ratio of about 10% and 15%, respectively, should provide some buffer against the deteriorating economic environment. Nonetheless, the bank's capital ratios could fall sharply if provisioning coverage is increased to a comparable level of its peers or if KTB increases lending to support the country's economic stabilisation.
Contacts: Patchara Sarayudh, Bangkok, Tel: +662 655 4761; Vincent Milton, +662 655 4759.
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