Bangkok--3 Apr--Fitch Ratings
Fitch Ratings has downgraded The Siam
Commercial Bank Public Company Limited's (SCB) Long-Term Issuer Default Rating
(IDR) to 'BBB' from 'BBB+' and Short-Term IDR to 'F3' from 'F2'. At the same
time, Fitch has affirmed SCB's National Long-Term Rating at 'AA+(tha)' and the
National Long-Term Rating of its wholly owned subsidiary, SCB Securities
Company Limited (SCBS), at 'AA(tha)'. The Outlook is Stable. A full list of
rating actions is detailed below.
The downgrades reflect SCB's challenging
operating environment and the large-scale economic disruptions 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 assist debt restructuring cannot
eliminate risk for weaker and more vulnerable debtors. For more detail on the
operating environment, please see,
"Coronavirus 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.
The duration and trajectory of the
coronavirus outbreak remains uncertain. As such Fitch expects that in a base
case scenario, SCB's asset quality and performance would be significantly
affected over the next two years with core ratios weakening significantly compared
with 2019. Aside from rising credit costs, the bank's top-line revenue will
continue to drag from the low interest-rate environment and more moderate
non-interest income.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
SCB's ratings are driven by its standalone
profile, as reflected in the Viability Rating. The senior debt represents the
bank's unsecured and unsubordinated obligations and is equalised with its
Long-Term IDR. 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 National ratings
and Thai baht-denominated senior debt reflects Fitch's view of SCB's credit
profile relative to Thailand's national-rating universe, which remains little
changed despite the bank's weakening trends, as indicated by the downgrade of
the IDRs.
Viability Rating
SCB's Viability Rating reflects its
competitive position as a leading commercial bank in Thailand, with particular
strength in retail lending, including mortgages. SCB has a solid domestic
franchise, with the top-three asset and deposit market shares of around 14%-15%
in 2019. It should be well-positioned to avoid further downgrade of its
Viability Rating, as Fitch regards SCB's buffers in terms of core equity Tier 1
(2019: 17%), loan-loss reserve coverage (2019: 134%) and liquidity and funding
profile to be superior than at most lower-rated banks. This should provide
cushion against rising risks and will be important for its recovery. Fitch also
believes the Bank of Thailand's relief measures on asset quality and loan
restructuring should support Thai banks, including SCB, to weather a sharply
deteriorating environment, albeit not make them immune to it.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating and Support Rating
Floor are based on SCB's systemic importance to the domestic financial system,
where it has the second-largest deposit market share. We believe that there is
a high probability that the government would provide extraordinary support to
the bank, if needed, given its role as one of Thailand's domestic systemically
important banks (D-SIBs).
SUBSIDIARY
The affirmation of SCBS's National
Long-Term Rating is consistent with the rating action on its parent, SCB. SCBS
is rated one notch below that of its parent, as Fitch's expects that SCBS would
receive ordinary and extraordinary support from SCB. Fitch views SCBS as a
strategically important subsidiary of SCB, based on name and brand sharing, direct
100% ownership and evidence of high management and operational integration.
SCBS also plays an important role in SCB's universal banking strategy.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Factors That Could, Individually or Collectively,
Lead to Positive Rating Action/Upgrade:
The IDRs and senior debt rating are
sensitive to changes in SCB's standalone profile, as indicated by the Viability
Rating. Positive action on SCB'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.
Changes in Fitch's perception of SCB's
credit profile relative to the national-rating universe in Thailand could
affect SCB's National Ratings. However, an upgrade of the National Ratings is
not probable in the near term, given SCB's credit profile and rating relative
to local large-bank peers.
Factors That Could, Individually or
Collectively, Lead to Negative Rating Action/Downgrade:
Negative action on the Viability Rating
would lead to similar action on the IDR and senior debt rating, although
downside may be limited to Fitch's assessment of the Support Rating and Support
Rating Floor, the latter of which is currently 'BBB-'. A downgrade of SCB's
National Ratings would likely arise from a weakening in its overall credit
profile on a relative basis to the national-rating universe.
Viability Rating
Factors That Could, Individually or
Collectively, Lead to Positive Rating Action/Upgrade:
The Viability Rating could be upgraded to
'bbb+' if SCB's profitability and asset quality metrics were more consistent
with those of higher-rated banks in similarly rated operating environments -
that is, with respect to the latter, maintaining an impaired loan ratio of
below 3% (given our 'bbb' category assessment of the operating environment) -
combined with the maintenance of sound buffers in loan-loss reserves and core capital;
for example, the common equity Tier 1 (CET1) ratio being sustainably above 16%.
Factors That Could, Individually or
Collectively, Lead to Negative Rating Action/Downgrade:
The Viability Rating could be downgraded
to 'bbb-' if SCB's capitalisation deteriorates further and is insufficient to
buffer against poor asset quality; for instance, the bank's CET1 ratio falls
below 13%, with a non-performing loan ratio above 6% and loan-loss coverage
ratio below 120% over the next two years. In our view, this could arise if
SCB's profitability was to be further compromised, with the potential for
deterioration in its profitability and asset quality reflecting both a
challenging operating environment and the bank's perceived appetite for risk.
SUPPORT RATING AND SUPPORT RATING FLOOR
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 of the state to provide
support to D-SIBs, including SCB. 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 SCB), but any assessment on the Support Rating Floor would
also need to consider no less propensity to support the banks.
Factors That Could, Individually or
Collectively, Lead to Negative Rating Action/Downgrade:
Fitch may take negative action on SCB's
Support Rating and Support Rating Floor if the government's ability to support
the bank diminishes. This may happen if the agency downgrades Thailand's
Long-Term Foreign-Currency IDR. Furthermore, if Fitch believes there is a lower
propensity of the state to provide support to D-SIBs, including SCB, the rating
could be downgraded. However, Fitch does not expect such changes over the
medium term.
SUBSIDIARY
Factors That Could, Individually or
Collectively, Lead to Positive Rating Action/Upgrade:
The National Rating of SCBS would be
affected by changes in the parent's National Rating. The ratings could also be
affected by any perceived increase in the propensity of SCB to provide support,
for example, if SCBS were to play a more critical role within the group as
evidenced by significant size and contribution relative to the parent.
Factors That Could, Individually or
Collectively, Lead to Negative Rating Action/Downgrade:
The ratings could also be negatively
affected by any perceived reduction in the propensity of SCB to provide support,
for example, if the parent were to significantly reduce its shareholding or if
operational and management linkages between the two entities weaken. 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