ข่าวประชาสัมพันธ์เศรษฐกิจ/การเงิน

Fitch Downgrades Bank of Ayudhya to ‘BBB+’; Outlook Stable

Fitch Ratings has downgraded Thailand-based Bank of Ayudhya Public Company Limited's (BAY) Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'A-' with a Stable Outlook, following similar rating action for its parent, MUFG Bank, Ltd. (A-/Stable/a-), which reflects reduced ability to provide extraordinary support to the subsidiary. The agency has affirmed BAY's Short-Term IDR at 'F1' and its Viability Rating at 'bbb'.

BAY's National Long-Term Rating has been affirmed at 'AAA(tha)'. The Outlook has been revised from Negative to Stable. The rating on its locally issued senior debt instruments have also been affirmed at 'AAA(tha)'.

BAY's Basel III Tier 2-compliant Thai baht subordinated notes have been downgraded to 'AA(tha)' from 'AA+(tha)'. The downgrade on the notes reflects Fitch's revised base-line notching for subordinated debt in our updated Bank Rating Criteria.

KEY RATING DRIVERS

IDRS, SUPPORT RATING, NATIONAL RATINGS AND
SENIOR DEBT

BAY's IDRs are driven by institutional support considerations from its Japan-based parent as Fitch believes there is a high likelihood of support from MUFG to BAY, which plays a key role in the parent's regional strategy. There are also strong synergies with the group in terms of providing banking services in south-east Asia. MUFG owns 76.9% of BAY and exercises management control over the Thai subsidiary. BAY's National Rating is relative to other issuers that Fitch rates on the national rating scale and we have assessed that BAY's credit profile remains in line with the strongest credits in the country. The senior debt rating is equalised with BAY's National Rating, as it constitutes unsecured and unsubordinated obligations of the bank.

There is a significant level of linkages between BAY and MUFG, including marketing, operations and risk management. BAY services the group's Japanese clients in Thailand, and there is ongoing business co-operation with other parts of the MUFG group across the region. MUFG also provides expertise to BAY in terms of financial products and IT systems.

VIABILITY RATING

BAY's Viability Rating of 'bbb' denotes its standalone profile, which takes into account BAY's position as one of Thailand's five largest banks, with a deposit market share of 11% as of end-2019. It operates a diversified business model, supporting a range of client segments and providing a full range of financial services. Aside from its close ties to the Japanese corporate client base, BAY also has a strong market share in retail banking.

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 restructuring, 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", published 2 April 2020, at http://www.fitchratings.com/site/pr/10116671.

The duration and trajectory of the pandemic remains uncertain. Fitch therefore expects BAY's performance in a base case-scenario to be affected over the next two years with core ratios weakening from those in 2019, albeit not as much as those of most domestic peers. The bank's top-line revenue will continue to be hampered by rising credit costs, the low interest-rate environment and more moderate non-interest income. We expect the bank's profitability to remain weak relative to its perceived risk appetite for at least the next two years.

SUBORDINATED DEBT

BAY's Basel III Tier 2 subordinated Thai baht notes are rated two notches below the bank's National Long-Term Rating. This is in line with Fitch's base-line notching approach in our updated Bank Rating Criteria, and takes into account our expectations of a poorer recovery rate compared with senior unsecured instruments. There is no additional notching for non-performance risks, as the notes do not incorporate going-concern loss-absorption features.

RATING SENSITIVITIES

IDRS, SUPPORT RATING, NATIONAL RATINGS AND
SENIOR DEBT

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

BAY's Long-Term IDR and Support Rating could be upgraded if the institutional support assumptions were strengthened. For example, an upgrade of MUFG's Long-Term IDR could reflect an improvement in support ability, and lead to rating upside.

There is no possibility of an upgrade to BAY's National Ratings or senior debt rating, which are at the top end of the scale.

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

Lower ability by MUFG to support BAY, indicated by a downgrade of its Long-Term IDR, may lead to a downgrade in the subsidiary's Long-Term IDR, senior debt rating, National Long-Term Rating and Support Rating.

A lower propensity by MUFG to support BAY would also be negative for the subsidiary's Long-Term IDR, National Long-Term Rating, senior debt rating, and Support Rating. For example, this may be indicated by a decline in shareholding to below 75%, combined with a decline in management control and business linkages. However, Fitch does not expect this to occur in the near term.

VIABILITY RATING

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

There may be upside to BAY's Viability Rating if the bank's franchise in the Thai market improves in line with other larger domestic systemically important banks, leading to a better competitive position and financial resilience. This may be seen from the operating profit/risk-weighted asset (RWA) ratio being sustained above 2.5%, combined with more stable and better-than-sector asset-quality ratios that are maintained below 2% without, in our view, a material increase in its risk appetite. However, the current challenging operating environment is likely to constrain the probability of upside in the next two years.

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

The Viability Rating could be downgraded if there is significant deterioration beyond Fitch's expectations in BAY's asset quality and earnings core metrics to levels weaker than peer and sector averages, which may lead to a reassessment of the bank's risk appetite and its ability to withstand the difficult industry conditions. Weakening asset quality may be indicated by a non-performing loan ratio of more than 4%, while that of earnings may be denoted by an operating profit/RWA ratio of less than 1.5%

SUBORDINATED DEBT

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

There is no upside to BAY's Basel III Tier 2 subordinated notes. The anchor rating is the bank's National Long-Term Rating, which is at the top end of the scale.

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

BAY's Basel III Tier 2 subordinated Thai baht notes would be similarly affected by a downgrade in the bank's National Long-Term Rating, which is the anchor rating.

BEST/WORST CASE RATING SCENARIO

International scale credit 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 https://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.

ESG CONSIDERATIONS

ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or 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.

Additional information is available on www.fitchratings.com