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Moody's, Fitch update outlook on Thai banks

Jul 30. 2019
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By THE NATION

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Moody's Investor Services has affirmed the long-term local and foreign currency deposit ratings of KasikornBank (Kbank), Krung Thai Bank (KTB) and Siam Commercial Bank (SCB) at Baa1, and those of CIMB Thai Plc (CIMBT) and Standard Chartered Bank(Thai) Plc or SCBT at Baa2.

It has also affirmed the long-term foreign currency deposit ratings of Bangkok Bank Plc (BBL), Bank of Ayudhya (BAY), Government Housing Bank (GHB), and United Overseas Bank (Thai) or UOBT at Baa1.

At the same time, Moody's has upgraded TMB Bank (TMB)'s long-term foreign currency deposit rating to Baa1 from Baa2.

Further, Moody's affirmed the long-term foreign currency senior unsecured programme rating of BBL, Export-Import Bank of Thailand (EXIMT), KBank, KTB and SCB at (P)Baa1, and the long-term foreign currency senior unsecured rating of EXIMT at Baa1 while the long-term foreign currency senior unsecured programme rating of TMB was upgraded to (P)Baa1 from (P)Baa2.

Moody's has also upgraded the Baseline Credit Assessments (BCA) and adjusted BCAs of BBL, KBank and SCB to baa1 from baa2, and those of KTB and TMB to baa3 from ba1.

The BCA and adjusted BCA of UOBT were upgraded to baa3 and a3 from ba1 and baa1 respectively. The BCAs and adjusted BCAs of these six banks were upgraded because they maintained good financial fundamentals despite the challenging credit cycle in Thailand. For SCBT, Moody's affirmed the adjusted BCA at baa2. The BCAs and adjusted BCAs of BAY, CIMBT, EXIMT, and GHB were unaffected by today's rating actions.

The long-term counterparty risk ratings (CRR) and counterparty risk assessment (CRA) of BBL, KBank and SCB were upgraded to A3 and A3(cr) from Baa1 and Baa1(cr) respectively. It affirmed the long-term CRR and CRA of KTB, SCBT and TMB at Baa1 and Baa1(cr) respectively. 

Moody's also upgraded the long-term CRR and CRA of UOBT to A2 and A2(cr) from A3 and A3(cr) respectively. The CRRs and CRAs of BAY, CIMBT, EXIMT, and GHB were unaffected by today's (July 30) rating actions.

Moody's changed the outlook on the long-term ratings of nine of the 11 Thai banks — with the exception of SCBT and TMB — to positive from stable. The outlook on the long-term ratings of SCBT is maintained at stable, while that of TMB is maintained at positive.

The changes in outlooks on the nine Thai banks follow Moody's affirmation of Thailand's Baa1 sovereign rating, and change in the outlook for the sovereign's rating to positive from stable on 25 July 25, 2019. 

Meanwhile, Fitch Ratings rated Thai banks' asset quality stable with further growth in capital. 

The first-half financial results of listed Thai banks were stable, with trends in asset quality and profitability broadly supportive of credit growth, Fitch Ratings says. 

Loan growth fell short of estimates, reflecting continued subdued business sentiment and consumer confidence. However, profitability and stability of returns are expected for the remainder of 2019, with a continued gradual buildup of capital to guard against downside risks as well as upcoming regulatory measures, such as IFRS9 implementation in 2020. 

Credit growth for Thai banks was much lower than expected at 1 per cent for the first half of this year, reflecting a lack of demand and conservative underwriting. While expected to improve, it will likely trail Fitch's full-year forecast of 7 per cent given the current trends, with increased preservation of capital as a result.

Anemic retail lending saw growth falling to 3.1 per cent for the first half , down from 7.8 per cent year on year due to slowing auto sales and the Bank of Thailand's (BOT) tightening of loan-to-value measures on mortgages that became effective in April. Corporate lending also encountered pressure, with mounting delays of approval for new infrastructure projects.

The country's GDP is expected to fall to 3.3 per cent this year from 4.1 per cent in 2018 before moderating to 3.5 per cent in 2020. Continued infrastructure project delays and lower investment by export-oriented firms remain downside risks, as does further escalation of the trade war.

Listed Thai banks' asset quality has been stable with an impaired loan ratio of 3.7 per cent as of June 30, 2019. More of the same is expected for the rest of the year. Downside risks could come from small to medium enterprise (SME), residential mortgage and auto loans segments, which have relatively high debt levels and a reduced capacity to withstand shocks. However, we do not expect a substantial increase in asset quality risk under current economic conditions, aided by the BOT's recent macro-prudential regulations and the banks' high loan loss reserves, with allowances at 152 per cent of impaired loans.

Core net interest margins are expected to be stable in the near term. Market expectations are for interest rates to be little changed while the low levels of credit growth should not pressure banks' liquidity given the system's liquidity coverage ratio stood at 173 per cent as of May 2019. We expect earnings trends going forward to be driven by fee income and credit costs. 

Return on assets for listed banks was 1.3 per cent as of June 31, down just 2 bps year on year but aided by a substantial decline in provisioning expense amid solid capital buffers and the expectation of credit improvement. 

At the same time, lower credit provisions helped offset higher employment costs, investment in operations and IT and the significant reduction in non-interest income, pressured by lower insurance premiums due to regulatory changes. 

Hence, expenses as a percentage of income rose to 46.2 per cent versus 44.3 per cent year on year and are expected to remain elevated in the near term.

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