BANK OF AYUDHYA
Fitch Ratings has affirmed
The Outlooks are Stable. Fitch has also affirmed the bank's Short-Term IDR at 'F1', Shareholder Support Rating (SSR) at 'bbb+' and Viability Rating (VR) at 'bbb'. A full list of rating actions is below.
Key Rating Drivers
Support-Driven Ratings: BAY's IDRs and National Ratings are driven by its SSR, which reflects Fitch's assessment that there is a high probability of support from its
The bank's National Ratings also take into account the bank's support-driven credit profile relative to other issuers rated on the Thai national scale. BAY's '
Important Role in Group: BAY's SSR is a notch lower than the parent's rating as Fitch views that the bank strategically important to the group's regional aspirations. BAY has synergies with the group by providing financial services in
Operating Environment Broadly Supportive: Fitch expects faster GDP growth of 3.7% in
Significant Franchise in
Steady Risk Profile: BAY's risk profile score of 'bbb' incorporates long-term consistency in the bank's asset quality performance, including during the Covid-19 pandemic. The score reflects the bank's exposures in retail lending, which may be subject to cyclical variations in the operating environment, while also considering the relatively large exposures to lower-risk multinational clients compared to other Thai banks. Fitch also believes that BAY benefits from support and oversight provided by MUFG in terms of its risk controls and processes.
Some Downside Risk to Asset Quality: We expect some deterioration in the impaired-loan ratio, as regulatory forbearance measures related to the pandemic expire at end-2023, although the increase in the ratio is likely to be moderate and gradual. Nevertheless, BAY's asset quality score of 'bbb', which is in line with the implied score, reflects that its impaired-loan ratio (1Q23: 2.9%) has been consistently better than peers' (1Q23 sector ratio: 3.4%). We expect BAY's asset quality to outperform the sector's due to its sizeable portion of higher-quality corporate loans.
BAY's high provisioning level, with loan loss allowances coverage of 154%, also provides a sizeable buffer that should allow the bank to manage upcoming formation of non-performing loans.
Earnings Improvement After Pandemic: BAY's earnings and profitability score of 'bbb-' is in line with the implied score. Key earnings metrics are improving in line with the sector trend, with operating profit-to-risk weighted assets ratio (OP/RWA) rising to 2.3% in 1Q23 (2022: 2.0%, 2021: 1.8%). Profitability has been driven by improving net interest margins in line with rising - albeit still relatively mild - interest rates, while holding credit costs down. Fitch expects these factors to be maintained in 2023-2024, as downside risks to asset quality recede.
Sound Capital Buffers: BAY has built up its common equity Tier 1 (CET1) ratio through internal capital generation, to 15.8% in 1Q23, which is slightly higher than the sector average of 15.4%. The capitalization and leverage score of 'bbb' reflects our expectation that the ratio will remain broadly steady and to act as a sound buffer against potential downside risks, particularly given expected moderate loan growth (even with its ongoing inorganic expansion).
Funding Reflects Ordinary Support: BAY's funding and liquidity score of 'bbb+' is higher than that of most peers in the market, and incorporates Fitch's assessment that the bank's sound domestic funding profile is enhanced and supported by its position in the MUFG group. MUFG directly provides substantial credit facilities to support the bank's operations and foreign-currency funding, as well as support in terms of liquidity management and contingency planning. BAY's position as a MUFG subsidiary also facilitates its access to other inter-bank and wholesale market funding options.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The IDRs and National Ratings on BAY would see downside in the event of negative action on the bank's SSR.
The bank's SSR could be downgraded if there is a decline in MUFG's ability or propensity to support BAY. For example, a downgrade of MUFG's Long-Term IDR would reflect a decline in support ability, and would likely affect BAY's SSR.
Significant reduction in linkages between MUFG and BAY could be a sign of the parent's lower propensity to extend support, and lead to negative action on the SSR. For example, this may be evident in a decline in MUFG's shareholding to below 50%, combined with reduced control, operational integration, and marketing linkages. However, Fitch does not expect any decline in support propensity in the medium term.
There could be negative rating action on the VR from significant deterioration in BAY's financial profile, which could reflect a much weaker operating environment, but also indicate that the bank's risk appetite and business profile were weaker than we had anticipated. For example, this may be indicated by the four-year average impaired loan ratio rising towards 4% (currently around 2.6%), combined with weaker buffers, such as a CET1 ratio of below 13% and a four-year average OP/RWA ratio of below 1.5% (currently around 1.9% and rising).
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
There could be positive rating action to BAY's Long-Term IDR if the bank's SSR is upgraded. The bank's Short-Term IDR could be upgraded if the Long-Term IDR is upgraded to 'A' or above.
There is no upside to BAY's National Ratings, which are at the top end of the scale.
The bank's SSR could be upgraded if there were improvements in MUFG's ability or propensity to support BAY. For example, positive rating action on MUFG's Long-Term IDR could be reflected in BAY's SSR, provided other support assumptions remain unchanged.
Providing that Fitch assesses the operating environment to have strengthened, upside to the VR could come from an enhanced franchise that leads to sustained long-term competitive advantages and solid improvements in financial performance, combined with maintenance of robust loss-absorption buffers. For example, this may be reflected by an average impaired-loan ratio of below 2%, a CET1 ratio above 17%, and the average OP/RWA ratio sustained above 3.5%.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
BAY's Thai baht-denominated senior bonds and senior unsecured medium-term note (MTN) programme are rated at the same level as the bank's National Long-Term Rating, as they represent the bank's unsubordinated and unsecured obligations.
BAY's Basel III Tier 2 subordinated notes are rated two notches below the anchor rating, which is the bank's support-driven National Long-Term Rating, as Fitch believes MUFG would provide support to BAY prior to the point of non-viability. The notching represents loss severity risk, to reflect the notes' subordinated status compared to senior debt. There is no additional notching for non-performance risk, as the notes have no going-concern loss absorption features such as coupon deferrals. The notching approach is in line with the baseline for these types of instruments in Fitch's rating criteria, and is consistent with how we rate other similar issuances in
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Any negative rating action on the bank's National Long-Term Rating would have a similar impact on the bank's senior bonds, its MTN programme, and its subordinated notes.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
There is no upside to the rating on the senior bonds or to the MTN programme as the anchor rating, the National Long-Term Rating, is at the top end of the scale.
There is no upside potential to the national rating on the subordinated notes unless we believe the loss severity in the event of non-performance can be mitigated significantly - which we currently do not expect.
VR ADJUSTMENTS
The operating environment score of 'bbb' has been assigned above the 'bb' category implied score for the following adjustment reason: sovereign rating (positive).
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 ranges from '
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.
Public Ratings with Credit Linkage to other ratings
BAY's SSR, IDRs and National Ratings are linked to MUFG's Long-Term IDR.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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