Bangkok--3 Apr--Fitch Ratings
Fitch Ratings has
downgraded KASIKORNBANK Public Company Limited's (KBank) Long-Term Issuer
Default Rating (IDR) to 'BBB', from 'BBB+', with a Stable Outlook, its
Short-Term IDR to 'F3' from 'F2', its Viability Rating to 'bbb', from 'bbb+',
its senior unsecured rating to 'BBB', from 'BBB+', and its Basel III Tier 2
compliant subordinated debt, which has been removed from Under Criteria
Observation, to 'BB+', from 'BBB'. At the same time, Fitch has affirmed KBank's
National Long-Term Rating at 'AA+(tha)' and the National Long-Term Rating of
its subsidiary, Kasikorn Securities Public Company Limited (KS), at 'AA(tha)'.
A full list of rating actions is at the end of this commentary.
The downgrade
reflects KBank's challenging operating environment and the large-scale economic
disturbance caused by the coronavirus pandemic. This is in addition to
Thailand's weak operating environment over the past several years due to muted
domestic and global economic growth. The Bank of Thailand's relief measures to
facilitate debt restructuring cannot fully eliminate risks for weaker and more
vulnerable debtors, especially the SME segment, to which KBank has a large exposure.
For more detail on Thailand's operating environment, please see Coronavirus
Outbreak Increases Challenges for Thai Banks' Operating Environment, dated 2
April 2020, at
https://www.fitchratings.com/research/banks/coronavirus-increases-challenges-for-thai-banks-operating-environment-02-04-2020.
Fitch's base-case
scenario sees KBank's asset quality and performance being significantly
affected over the next two years, with core ratios weakening from 2019, as the
duration and trajectory of the pandemic remains uncertain. The bank's top-line
revenue will continue to be dragged by the low interest-rate environment and
more moderate non-interest income, in addition to rising credit costs.
KEY RATING DRIVERS
IDRS, NATIONAL
RATINGS AND SENIOR DEBT
The bank's IDRs,
National Ratings and senior debt rating are based on its Viability Rating,
which is assessed from the bank's standalone profile. KBank's National Ratings
are also driven by comparison with other Thai financial institutions rated on
the national scale. The Short-Term IDR corresponds to criteria and takes into
consideration Fitch's assessment of the bank's funding and liquidity profile,
which is assessed at 'bbb'.
The affirmation of
the bank's National Ratings reflects Fitch's view on KBank's credit profile
compared with Thailand's National Rating universe, which is not significantly
changing despite its downgraded IDRs.
Viability Rating
KBank's Viability
Rating reflects its competitive position as one of the leading local commercial
banks. Its franchise is supported by the bank's stable and large operating
scale, with core strengths in digital and transactional banking. KBank has
universal banking operations and serves a broad client segment. However, it is
more exposed to the SME sector than other large banks, which hampers its asset
quality at this point of the business cycle, and will lead to further pressure
on the bank's profitability. Like other large Thai banks, profitability is not
commensurate with our assessment of the bank's risk appetite.
The bank maintains
a superior profile and greater loss-absorption buffers relative to lower-rated
banks, and we expect this to limit downward pressure on the bank's ratings in
the next 12-18 months. KBank's above-sector-average capitalisation of 16.2% of
common-equity Tier-1 in 2019 should support its credit profile at the current
rating level. We also expect the bank's loan-loss provisions of around 149%,
with adequate retention on collateral, particularly for SME loans, to provide
some buffer against likely asset-quality deterioration. In addition, KBank's
domestic liquidity profile is supported by its strong current account-savings
account ratio of 77%, which leads to stable low-cost funding.
SUPPORT RATING AND
SUPPORT RATING FLOOR
The bank's Support
Rating and Support Rating Floor are assessed on its systemic importance to the
domestic financial system, which is evident from its deposit market share of
about 15%. KBank has been designated as one of Thailand's five domestic
systemically-important banks (D-SIB) by the Bank of Thailand, and we believe
there is a high probability the state will provide extraordinary support to the
bank, if needed.
SUBORDINATED DEBT
KBank's Basel III
Tier 2 subordinated notes (which have been issued internationally and
domestically) are rated two notches below their respective international and
domestic scale anchor ratings. The downgrade on the notes reflects Fitch's
revised base line notching for subordinated debt in the updated Bank Rating
Criteria. This takes into account our expectations of a poorer recovery rate
compared with senior unsecured instruments. There is no additional notching for
non-performance risk due to the absence of going-concern loss-absorption
features.
SUBSIDIARY AND
AFFILIATED COMPANY
The affirmation on
KS's National Rating is based on Fitch's view that the parent's propensity to
support KS is unchanged. KS remains a strategically important subsidiary of
KBank due to the near-full ownership, close name association, control and its
important role in supporting its parent's universal-banking aspirations. The
one-notch rating differential between KS and KBank reflects KS's small scale as
a non-bank entity and limited contribution to the group.
RATING
SENSITIVITIES
IDRS, NATIONAL
RATINGS AND SENIOR DEBT
Factors that
could, individually or collectively, lead to positive rating action/upgrade:
KBank's IDRs,
National Ratings and senior debt ratings are sensitive to changes in its
standalone profile, as reflected by its Viability Rating. Changes in Fitch's
assessment of KBank's credit profile relative to its peers within Thailand's
national-rating universe could also affect KBank's National Ratings.
Positive action on
KBank's Viability Rating could lead to similar action on the bank's Long-Term
IDR and senior debt rating, while an upgrade of the Long-Term IDR or in Fitch's
assessment of the bank's funding and liquidity profile, could result in an
upgrade of the Short-Term IDR. The rating upside for KBank's National Rating is
limited due to the bank's profile and rating relative to local large-bank
peers.
Factors that
could, individually, or collectively, lead to negative rating action/downgrade:
Negative action on
KBank's Viability Rating could lead to similar action on the bank's Long-Term
IDR and senior debt rating. KBank's National Rating could be downgraded to
'AA(tha)' if its Viability Rating were further downgraded or if, in Fitch's
opinion, its credit profile weakens on a relative basis in the National Rating
universe of Thai financial institutions.
VIABILITY RATING
Factors that
could, individually or collectively, lead to positive rating action/upgrade:
KBank's Viability
Rating could be upgraded to 'bbb+' if its key financial profile metrics were
more consistent with those of higher-rated banks in similarly rated operating
environments; that is, those in the 'bbb' category. This includes maintaining
an impaired loan ratio of less than 3%, combined with sound loan-loss reserves
and core capital buffers; for instance, a common-equity Tier 1 ratio
sustainably above 16%. Maintaining better asset quality would support
profitability which, in turn, would support better internal capital generation
and capitalisation. Fitch views its profitability as weak at the current rating
and for its perceived level of risk appetite.
Factors that
could, individually, or collectively, lead to negative rating action/downgrade:
A sharp decline in
capitalisation, such that it would provide limited buffer in the event of
further asset-quality deterioration, may lead to a downgrade in the Viability
Rating to 'bbb-'. For example, if its common-equity Tier 1 ratio were to
deteriorate to below 13%, with its non-performing loan ratio at above 6% and
loan-loss coverage ratio below 120% over the next two years. This would likely
reflect profitability (which we assess as being similar to other large local
peers) deteriorating by more than is expected in our base case.
SUPPORT RATING AND
SUPPORT RATING FLOOR
Fitch may reassess
the Support Rating and Support Rating Floor if there is a change in the
government's ability and propensity to provide support.
Factors that
could, individually or collectively, lead to positive rating action/upgrade:
The Support Rating
Floor could be upgraded if Fitch assesses that there is a higher propensity for
the state to provide support to D-SIBs, including KBank. However, Fitch does
not expect such changes over the medium term. An upgrade of Thailand's
Long-Term Foreign-Currency IDR of 'BBB+'/Stable may also indicate the
government's higher ability to support banks (including KBank), but any
assessment on the Support Rating Floor would also need to consider there is no
lower propensity to support the banks.
Factors that
could, individually, or collectively, lead to negative rating action/downgrade:
Negative action
could be taken on the Support Rating and Support Rating Floor if the
government's ability to provide support declines. This may happen if the agency
downgrades Thailand's Long-Term Foreign-Currency IDR of 'BBB+'/Stable or if
Fitch believes that the state has reduced its propensity to provide support to
the bank, although we do not expect such a change over the medium term.
SUBORDINATED DEBT
Factors that
could, individually or collectively, lead to positive rating action/upgrade:
KBank's
subordinated debt instruments would be affected by an upgrade of the anchor
ratings.
Factors that
could, individually, or collectively, lead to negative rating action/downgrade:
KBank's
subordinated debt instruments would be affected by a downgrade of the anchor
ratings.
SUBSIDIARY AND
AFFILIATED COMPANIES
Any changes in
KBank's National Ratings could lead to similar rating action on KS. The ratings
could also be affected by any perceived changes in the propensity of KBank to
support KS.
Factors that
could, individually or collectively, lead to positive rating action/upgrade:
Fitch may upgrade
KS's National Ratings if KBank demonstrates greater propensity for supporting
the subsidiary. This may happen if KS becomes a more significant part of KBank's
business.
Factors that
could, individually, or collectively, lead to negative rating action/downgrade:
Weakening in
KBank's ability or propensity to support; for example, if the parent
significantly reduces its shareholding, financial and operational support
commitment or its marketing and management linkages, could negatively affect
the ratings of KS. However, Fitch does not expect such changes in the medium
term.
BEST/WORST CASE
RATING SCENARIO
Ratings of
financial institutions issuers have a best-case rating upgrade scenario
(defined as the 99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a worst-case
rating downgrade scenario (defined as the 99th percentile of rating
transitions, measured in a negative direction) of four notches over three
years. The complete span of best- and worst-case scenario credit ratings for
all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario
credit ratings are based on historical performance. For more information about
the methodology used to determine sector-specific best- and worst-case scenario
credit ratings, visit www.fitchratings.com/site/re/10111579
ESG CONSIDERATIONS
The highest level
of ESG credit relevance, if present, is a score of 3. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity(ies), either
due to their nature or to the way in which they are being managed by the
entity(ies). For more information on Fitch's ESG Relevance Scores, visit
www.fitchratings.com/esg
REFERENCES FOR
SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal
sources of information used in the analysis are described in the Applicable
Criteria.
Additional
information is available on www.fitchratings.com