Fitch Affirms Bangkok Bank at ‘BBB’ /Stable; Revises Support Rating Floor to ‘BBB’

Fitch Ratings – Bangkok/Singapore – 26 Mar 2021: Fitch Ratings has affirmed Bangkok Bank Public Company Limited’s (BBL) Long-Term Issuer Default Rating (IDR) at ‘BBB’, and has revised the bank’s Support Rating Floor to ‘BBB’ from ‘BBB-‘. The Outlook is Stable.

The revision of the Support Rating Floor follows Fitch’s re-assessment of the authorities’ propensity to provide support to systemically important banks. Market volatility during the pandemic has led to deposit inflows to Thailand’s major banks, solidifying our view of their systemic importance. The revision is also in line with our rating approach for similarly sized banks in other Asian emerging markets. BBL is one of Thailand’s largest commercial banks, with an 18% deposit market share as of end-2020.

A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

IDRS, NATIONAL RATINGS AND SENIOR DEBT

BBL’s IDRs and National Ratings are driven by its standalone profile, as reflected in the Viability Rating. That said, the revised Support Rating Floor limits the risk of a downgrade of the bank’s IDRs, even in the event of further deterioration in its intrinsic credit profile – absent any weakening of the factors that underpin the Support Rating Floor. BBL’s National Ratings also take into account a comparison of the bank’s credit profile relative to that of other entities rated on the Thai national scale.

BBL’s senior debt represents the bank’s unsecured and unsubordinated obligations and is equalised with its Long-Term IDR and National Ratings.

The Short-Term IDR takes into consideration Fitch’s assessment of the bank’s funding and liquidity profile, the mid-point of which is assessed at ‘bbb+’.

VIABILITY RATING

BBL’s Viability Rating is underpinned by its strong domestic franchise, with particular strengths in corporate and international banking. BBL has the largest overseas presence among Thai banks; overseas loans account for around 23% of BBL’s portfolio following its 2020 acquisition of Indonesia-based PT Bank Permata Tbk (AA+(idn)/Stable).

The Viability Rating takes into account pressure on earnings and asset quality from the pandemic-related economic disruption in 2020 and the slow recovery we expect during 2021-2022. We believe the system’s impaired loan ratio will rise further in 2021 (BBL: 4.4% at end-2020) and will remain elevated through to 2022. BBL has historically maintained high loan-loss allowance coverage (end-2020: 178%, sector average: 142%), which provides a sound buffer against downside risks to earnings and capital. The bank’s excess provisioning has dampened profitability, which was also hit by margin compression, declining fee income, and rising operating costs from the Permata deal.

The acquisition of Permata led to a one-off decline in capital ratios; the Common Equity Tier 1 ratio (CET1) was 14.9% at end-2020, against 17.0% at end-2019. This decline was in line with our expectations and was factored into prior rating action. We do not foresee any added near-term pressure on capital. Over the medium term, we expect BBL’s capital management to remain similar to that of other large Thai banks, and for core equity to be gradually rebuilt from internal capital generation.

The Viability Rating also reflects BBL’s above-peer liquidity profile. Its deposits rose substantially in 2020, as depositors sought safe havens in response to financial market volatility; this underlines BBL’s systemic importance. BBL’s loan/deposit ratio fell to 84.5% in 2020, from 87.1% in 2019, and remains significantly lower than the sector average of 92.4%; we expect BBL to maintain a relatively low loan/deposit ratio compared with other Thai banks over the medium term.

SUPPORT RATING AND SUPPORT RATING FLOOR

We assess BBL’s Support Rating and Support Rating Floor based on our perception of the bank’s systemic importance to the domestic financial system, which leads to a higher propensity of government support. BBL has a long history as one of Thailand’s largest banks and is designated as one of the country’s five domestic systemically important banks by the Bank of Thailand. The bank saw substantial deposit growth of 19% in 2020, reflecting its safe-haven status in the local market and further evidence of its systemic importance. Our assessment of the Support Rating Floor incorporates our view that a new resolution framework that facilitates senior debt bail-in will not be introduced in the long term. The Support Rating Floor also reflects the government’s sound ability to support the bank, as reflected by the sovereign’s ‘BBB+’/Stable rating.

SUBORDINATED DEBT

BBL’s Tier 2 subordinated notes are rated two notches below the anchor rating – the Viability Rating – to reflect the loss severity risk of the instruments. There is no additional notching for non-performance risk due to the absence of going-concern loss-absorption features. The notching and issue rating is in line with our baseline approach in our criteria to rating similar subordinated debt instruments.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS, AND SENIOR DEBT

Factors that could, individually or collectively, lead to positive rating action/upgrade:

There could be positive rating action on BBL’s IDRs, National Ratings and senior debt ratings following similar changes in either its Support Rating Floor or Viability Rating. The National Ratings of BBL would also take into account the relative creditworthiness of peers rated on the national scale.

Factors that could, individually, or collectively, lead to negative rating action/downgrade:

Concurrent negative action on BBL’s Viability Rating and Support Rating Floor would lead to similar action on the bank’s Long-Term IDR, National Long-Term Rating, and senior debt rating. BBL’s National Rating could also be downgraded to ‘AA(tha)’ if, in our opinion, its credit profile weakens on a relative basis in the National Rating universe of rated entities in Thailand.

VIABILITY RATING

Factors that could, individually or collectively, lead to positive rating action/upgrade:

BBL’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. This includes maintaining an impaired loan ratio of less than 3% and an operating profit/risk-weighted asset ratio of above 2.5% (2020: 0.76%), combined with sound loan-loss reserves and core capital buffers; for instance, a CET1 ratio sustainably above 16%. Maintaining improved asset quality would support earnings, which, in turn, would support medium-term profit retention and capitalization.

Factors that could, individually, or collectively, lead to negative rating action/downgrade:

The Viability Rating could be downgraded to ‘BBB-‘ if the bank’s financial position were to deteriorate below our expectation. This would likely be reflected by downward revisions to multiple rating factors, which may be a result of a much weaker operating environment; for example, such stresses may be indicated by an impaired loan ratio of above 6% for a sustained period, combined with weaker loss-absorption buffers, such as a CET1 ratio of below 13% and a loan-loss coverage ratio of below 120% (2020: 178%).

SUPPORT RATING AND SUPPORT RATING FLOOR

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of Thailand’s Long-Term Foreign-Currency IDR may indicate the government‘s higher ability to support banks, including BBL, but any upward revision of the Support Rating Floor would be dependent on there being no lower propensity to support banks. Should the sovereign rating remain unchanged, it is unlikely that there would be further positive action on BBL’s Support Rating Floor.

Factors that could, individually, or collectively, lead to negative rating action/downgrade:

Negative action could be taken on the Support Rating Floor if the government’s ability to provide support declines, which could be indicated by a downgrade of Thailand’s Long-Term Foreign-Currency IDR. There may also be negative rating action if we believe that the state has reduced its propensity to provide support, such as through a large decline in BBL’s level of systemic importance or significant regulatory changes. However, we believe there is little prospect of a weaker propensity to support systemically important banks, such as BBL, over the medium-term.

SUBORDINATED DEBT

Factors that could, individually or collectively, lead to positive rating action/upgrade:

BBL’s subordinated debt instruments would be upgraded if the anchor rating – the Viability Rating – was upgraded.

Factors that could, individually, or collectively, lead to negative rating action/downgrade:

A downgrade of BBL’s Viability Rating would lead to a downgrade of the subordinated debt.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond 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 range 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.

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