Bangkok--3 Apr--Fitch Ratings
Fitch Ratings has affirmed Krung Thai Bank
Public Company Limited's (KTB) Long-Term Issuer Default Rating (IDR) at 'BBB'
and National Long-Term Rating at 'AA+(tha)'. Fitch has also affirmed the bank's
50%-owned securities firm Krungthai Zmico Securities Company Limited's (KTZ)
National Long-Term Rating at 'A+(tha)'. The Outlooks are Stable.
At the same time, Fitch downgraded KTB's
subordinated debt to 'AA-(tha)' from 'AA(tha).
A full list of rating actions is at the
end of this commentary.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
KTB's ratings are driven by its Support
Rating of '2' and Support Rating Floor of 'BBB' as Fitch believes there is a
high probability that the state would provide extraordinary support to KTB, if
needed.
VIABILITY RATING
KTB's standalone profile, as reflected in
its Viability Rating (VR) of 'bbb-', takes into account the bank's large
domestic franchise with a solid client base, particularly among state
enterprises and civil servants. These relationships with government-related
entities help KTB to sustain its stable funding profile and competitiveness.
KTB's capitalisation has improved, is now more in line with similarly rated
global peers, and provides some buffer at the current rating. Nonetheless,
KTB's common equity Tier 1 (CET1) ratio of 15.2% at end-2019 remains below the
Thai sector average of 16%. Fitch also views KTB as having a higher risk
appetite than large domestic peers because the bank supports some government
initiatives.
The VR also takes into account Fitch's
expectations of a much more challenging operating environment and large-scale
economic disruptions from the coronavirus pandemic. This scenario will
exacerbate Thailand's already weakening landscape in the past several years on
slower domestic and global economic growth. The Bank of Thailand has
implemented regulatory relief measures to assist debt restructurings, but these
measures cannot eliminate the economic risks to weaker and more vulnerable
debtors. For details on Thailand's 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
pandemic remains uncertain. As such, Fitch expects that in a base
case-scenario, KTB's asset quality and performance would be affected over the
next two years with core ratios weakening significantly against 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.
However, KTB's lower VR (one notch below
large domestic banks) should partly capture these greater volatilities relative
to higher-rated banks in similarly rated operating environments. KTB's buffers,
in terms of capital and loan-loss reserve coverage (132% at end-2019), should
easily absorb the additional risk. Likewise, the Bank of Thailand's regulatory
relief measures on banks' asset quality and debt restructuring should help
banks to at least partly manage the risk, although we still see all Thai banks'
performances deteriorating over the next two years.
SUPPORT RATING AND SUPPORT RATING FLOOR
(SRF)
The Support Rating and SRF of KTB is
underpinned by Fitch's belief that there is a high probability the government
will extend extraordinary support to KTB in times of need. The central bank has
named KTB as one of the five domestic systemically important banks (D-SIBs) in
Thailand. Fitch also believes that KTB is strategically important to the
government, as it is the only commercial bank majority-owned by the state.
Hence it is well-positioned (systems and branch network, for example) to
support state initiatives such as the nationwide e-wallet programme.
SUBORDINATED DEBT
KTB's Basel III Tier 2 subordinated Thai
baht-denominated notes were downgraded to 'AA-(tha)', which is two-notches
below the support-driven National Long-Term Rating - the anchor rating for
these notes. This is consistent with Fitch's baseline notching approach for
subordinated debts in Fitch's revised Bank Rating Criteria, as we view the
notes as having a poorer recovery rate compared with senior unsecured
instruments. The Basel III Tier 2 notes are subordinated to senior unsecured
instruments and have no mandatory full write-down feature. There is no
additional notching for incremental non-performance risks, as the notes do not
incorporate going-concern loss absorption such as coupon omission or deferral
features.
SUBSIDIARY
KTZ's National Long-Term Rating is three
notches below that of its largest shareholder, KTB. The rating reflects the
near-parity of KTZ's majority and minority shareholders as well as a degree of
uncertainty over the government's actions and priorities in its role as the
group's ultimate shareholder if KTB, the immediate parent, was unable to
support the subsidiary on its own when under financial stress. Nonetheless,
there has been evidence of strengthening linkage over the past year, such as
closer name and logo association with that of KTB. KTZ also provides key
products and services for KTB's clients, but the level of integration is weaker
than other Fitch-rated banks' securities firm subsidiaries.
KTZ's senior unsecured debts are rated on
par with the issuer's National Long-Term Rating of 'A+(tha)' as the company's
senior debt rating constitutes its unsecured and unsubordinated debt
obligations.
ESG - Governance: KTB has an ESG Relevance
Score of '4' for Governance Structure due to the potential influence of the
state on the bank's risk governance in light of the government's controlling
stake and control over the bank's board and management, which could negatively
affect the credit profile. This is relevant to the rating in conjunction with
other factors.
RATING SENSITIVITIES
IDRS AND SENIOR DEBT
Factors that could, individually or
collectively, lead to positive rating action/upgrade:
The IDR and ratings on KTB's senior debt
would be affected by changes in its Support Rating Floor, which reflects
Fitch's view on the sovereign's capacity and propensity to provide timely
extraordinary support to KTB. Hence, an upgrade in Support Rating Floor (see
below) could lead to upgrades of these ratings.
Factors that could, individually or
collectively, lead to negative rating action/downgrade:
A downgrade of the Support Rating Floor
(see below) could lead to downgrades.
NATIONAL RATINGS AND SENIOR DEBT
Factors that could, individually or
collectively, lead to positive rating action/upgrade:
An upgrade could be triggered if Support
Rating Floor is equalised with Thailand's Long-Term Foreign Currency IDR, which
is unlikely to be the case in the near-term.
Factors that could, individually or
collectively, lead to negative rating action/downgrade:
A weakening of KTB's credit profile,
relative to other entities with national ratings in Thailand, could lead to a
downgrade. This could arise from, for example, Fitch assessing the government
as having a lower ability or propensity to support the bank.
VIABILITY RATING
Factors that could, individually or
collectively, lead to positive rating action/upgrade:
A VR upgrade is unlikely at this stage due
to operating environment challenges and the bank's perceived risk appetite
(relative to large local peers), which we expect to contribute to some
deterioration in asset quality and earnings in the next two years.
Factors that could, individually or
collectively, lead to negative rating action/downgrade:
KTB's VR could be downgraded to 'bb+' if
capital levels fall to a level that we assessed as an inadequate buffer against
loss, eg CET1 ratio below 13%.
SUPPORT RATING AND SUPPORT RATING FLOOR
(SRF)
Factors that could, individually or
collectively, lead to positive rating action/upgrade:
An upgrade of the Support Rating seems
unlikely, unless Thailand's Long-Term Foreign-Currency IDR is upgraded to 'A'
and Fitch's view on propensity to support is unchanged. The SRF of KTB could
change if Fitch changes its view on the propensity of the state to provide
support to the bank. There may be upside to the SRF if Fitch assesses that
KTB's policy role is clearer and more prominent than currently envisaged,
combined with continued domestic systemic importance.
Factors that could, individually or
collectively, lead to negative rating action/downgrade:
A downgrade Thailand's Long-Term
Foreign-Currency IDR could lead to a downgrade of the Support Rating Floor. The
Support Rating could be revised down if the sovereign rating is downgraded to
'BBB-' or below. On the other hand, KTB's SRF could be equalised with
private-sector D-SIBs if Fitch believes state linkages have declined substantially,
eg decline in shareholding to below 50% and no more links with the Ministry of
Finance on government cash management.
SUBORDINATED DEBT
Factors that could, individually or
collectively, lead to positive rating action/upgrade:
KTB's Thai baht subordinated debt
instruments would be affected by changes in National Long-Term Rating, which is
the anchor rating. Hence, an upgrade of National Long-Term Rating could lead to
an upgrade of the subordinated debt.
Factors that could, individually or collectively,
lead to negative rating action/downgrade:
A downgrade of National Long-Term Rating
could lead to a downgrade of the subordinated debt.
SUBSIDIARY
Factors that could, individually or
collectively, lead to positive rating action/upgrade:
Fitch may upgrade KTZ's National Ratings
if KTB demonstrates greater propensity for supporting the subsidiary than our
current assessment. This may happen, for example, if KTB increases its stake in
(and takes greater control of) the company or if KTZ plays a more significant
role for the bank.
Factors that could, individually or
collectively, lead to negative rating action/downgrade:
Conversely, Fitch could downgrade KTZ's
National Ratings if its strategic importance to the bank were to diminish and
thereby reduce the parent's propensity to extend support. This may happen if
KTB reduces its stake to no longer be the largest shareholder or exercise
control of the company, if it withholds its financial or operational
commitments to its subsidiary, or if future performance of the subsidiary or at
the parent bank leads to changes in strategic priorities and raises questions
over support prospects from the parent.
KTZ's senior unsecured debt rating is
sensitive to its National Long-Term Rating.
ESG CONSIDERATIONS
KTB has an ESG Relevance Score of 4 for
Governance Structure due to potential influence of the state on the bank's risk
governance.
Except for the matters discussed above,
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.
BEST/WORST CASE RATING SCENARIO
Ratings of financial institution 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.
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