Fitch Ratings has affirmed KASIKORNBANK Public Company Limited's (KBank) Long-Term Issuer Default Rating (IDR) at 'BBB' and National Long-Term Rating at 'AA+(tha)'.

The Outlook is Stable. Fitch has also affirmed the bank's Viability Rating (VR) at 'bbb', Government Support Rating (GSR) at 'bbb' and the Short-Term IDR at 'F2 '.

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

Key Rating Drivers

Driven by VR, Backstopped by Support: KBank's Long-Term IDR and National Ratings are driven by the bank's standalone credit profile, as indicated by its VR, which is at the same level as its GSR. KBank's Short-Term IDR is at the higher option of 'F2', to reflect that the likelihood of government support is more certain in the near term. The National Ratings also take into account KBank's credit profile compared with other entities on the Thai national rating scale, and denotes expectations of a very low level of default risk relative to other issuers in the country.

Operating Environment Broadly Supportive: Fitch expects improving GDP growth of 3.7% in Thailand in 2023 (2022:2.6%) to help banks' business prospects and borrower repayment ability. Nevertheless, leverage has risen during the pandemic - private-sector credit to GDP was 156% at end-2022, which may lead to downside risks should economic prospects unexpectedly deteriorate. The implied operating environment score is in the 'bb' category, but we apply a positive adjustment to 'bbb' based on the Thai sovereign rating of 'BBB+', given our view that the sovereign supports market stability.

Strong Domestic Franchise: KBank's business profile score of 'bbb+' is above the OE score, reflecting its robust domestic franchise and business model diversity, which gives it a sustainable competitive advantage and supports its ability to generate sustainable profits through the cycle while controlling risk.

KBank has particular expertise in the SME segment and in transactional banking, and it has been building up its digital banking capabilities, supported by long-standing client relationships and a popular mobile application with 20 million users. KBank has a universal banking model, and has operations via subsidiaries in key financial segments, such as fund management, equity brokerage and insurance, which contribute to its overall franchise.

Substantial Exposure to SMEs: KBank's risk profile score of 'bbb-' incorporates its exposures to more-vulnerable client segments, such as SME borrowers, as well as its relatively rapid growth in retail lending during the challenging economic environment in 2019-2022. These exposures have contributed to a more volatile asset quality performance compared with peers that are also domestic systemically important banks (D-SIBs). Nevertheless, the score also considers Fitch's expectation that KBank has sufficient risk management expertise to control the credit risk on these exposures over the cycle.

Adequate Asset Quality: Fitch expects KBank's impaired-loan ratio to increase slightly in 2023 from 3.6% at end-March 2023, due to continued delinquencies from SME and corporate clients. The bank's exposure to the at-risk SME client segment is higher than peers, but the asset quality risk is balanced by the high collateral coverage for its SME portfolio, and the bank's loan-loss allowance buffer of 144% at end-March 2023. The bank's asset quality score of 'bbb-' is above the implied 'bb' category score, reflecting KBank's collateral and reserves.

Recovering Profitability: KBank's profitability was affected by rising credit costs, but the bank's core earnings ratio remains relatively sound compared to its large-bank peers. Operating profit-to-risk weighted assets (OP/RWA) rose to 2.1% in 1Q23 (2022: 1.7%), and Fitch expects KBank's profitability to gradually improve over the next two years, which will would strengthen its position at current factor score of 'bbb-'.

Satisfactory Capital Buffer: KBank's 'bbb+' capitalisation and leverage score reflects its common equity Tier 1 (CET1) ratio of 15.9% at end-1Q23 that was higher than the sector average of 15.4%, and remains a source of credit strength for the bank as it provides a significant buffer against unexpected downside risks. Fitch expects the bank's core capital levels to remain broadly stable over the medium term, supported by the bank's sound earnings generating capacity and moderate levels of loan growth.

Sustainable Funding Profile: KBank's 'bbb' funding and liquidity score reflects its sound deposit franchise, particularly for retail and SME clients. The bank has a high portion of current and savings deposit accounts (82% of total deposits at end-1Q23, sector average 74%), which are mainly transactional accounts that provide the bank with a steady and low-cost deposit base. The bank's loan-to-deposit ratio declined slightly to 91% by end-March 2023 from 93.8% in December 2021, which is a reflection of its healthy liquidity profile.

Systemic Importance Drives GSR: KBank's GSR reflects our view that there is a high probability of extraordinary support from the Thai government, if needed. KBank is one of the largest banks in Thailand, with a deposit market share of around 16% in 2022. It has been designated as one of the country's six D-SIBs by the Bank of Thailand, reflecting its significant scale and financial system linkages.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

There would be negative rating action on KBank's Long-Term IDR and National Long-Term Rating only if both the GSR and VR were to be downgraded. KBank's National Long-Term Rating could also be downgraded to 'AA(tha)' if, in Fitch's opinion, its credit profile weakens relative to other entities rated on the Thai national rating scale.

The bank's Short-Term IDR would be downgraded if its Long-Term IDR was downgraded to 'BBB-'.

The VR could be downgraded to 'bbb-' if there were substantial deterioration in KBank's core financial metrics, which could reflect a much weaker operating environment and indicate a weaker-than-expected risk profile. For example, this may be indicated by a four-year average impaired-loan ratio of 6% or more, combined with weaker loss-absorption buffers, such as its CET1 ratio at below 13% and loan-loss coverage ratio at below 120%, and an average OP/RWA ratio falling below 1.5%.

There could be negative action on the GSR if there was a downgrade of Thailand's Long-Term Foreign-Currency IDR (BBB+/Stable), which would indicate the government's reduced ability to support KBank. A reduction in the government's propensity to support KBank may also lead to negative rating action. This may, for example, be seen through a large decline in the bank's market share or significant regulatory changes. However, we believe it is unlikely that there would be changes in government support propensity over the medium term.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

There could be positive rating action on KBank's IDRs and National Ratings following similar changes in either its GSR or VR. The National Ratings on KBank would also take into account the relative creditworthiness of peers rated on the national scale.

The bank's VR could be upgraded to 'bbb+' over the long term should successful execution of strategies lead to a sustained and substantial improvement in the bank's financial performance without weakening its risk profile. This would likely be supported by a much stronger operating environment, contributing to meaningful and sustainable improvements in core financial metrics, such as the four-year average OP/RWA ratio being above 2.5% and the four-year average impaired-loan ratio declining to below 3%, combined with the maintenance of other key loss-absorption buffers, such as a CET1 ratio of above 16%.

An upgrade of the GSR may be triggered by a similar action on Thailand's Long-Term Foreign-Currency IDR as this would indicate the government's higher ability to support systemically important banks such as KBank, although Fitch would also assess whether the government's propensity to support banks remains intact.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Senior Unsecured Debt:

KBank's senior Us dollar debt is rated at the same level as the bank's Long-Term IDR, as they represent the bank's unsubordinated and unsecured obligations. KBank's senior unsecured notes issued in the local market and MTN programme are rated at the same level as the bank's National Long-Term and National Short-Term Ratings.

Subordinated Debt:

KBank's Basel III Tier 2 subordinated notes are rated two notches below the anchor rating, the VR, to reflect loss severity risk. There is no additional notching for non-performance risk due to the absence of going-concern loss-absorption features. The notching is in line with Fitch's baseline approach in the criteria to rating similar subordinated debt instruments, and is consistent with our approach to rating other Tier 2 instruments issued by Thai banks.

KBank's Long-Term IDR(xgs) and its senior unsecured long-term notes rating (xgs) are driven by its VR. The bank's Short-Term IDR(xgs) is mapped to 'F3(xgs)' as the bank's funding and liquidity score does not qualify for the higher option under Fitch's criteria.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

KBank's senior debt would be downgraded if there was negative rating action on the anchor rating, the Long-Term IDR.

Any negative rating action on the bank's VR would have a similar impact on the bank's Tier 2 subordinated notes.

KBank's Long-Term IDR (xgs) and long-term senior unsecured note rating (xgs) could be downgraded if the bank's VR were to be downgraded. The bank's Short-Term IDR (xgs) would be downgraded if the bank's Long-Term IDR (xgs) were to be downgraded to 'BB+(xgs)' or lower.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: An upgrade of the Long-Term IDR would lead to similar rating action on the bank's senior debt ratings.

There could be positive rating action on KBank's Tier 2 subordinated debt instruments following similar action on the VR.

KBank's Long-Term IDR (xgs), Short-Term IDR (xgs), and long-term senior unsecured note rating (xgs) could be withdrawn if the bank's VR was upgraded, as the bank's IDRs would then not be support driven.

VR ADJUSTMENTS

The operating environment score of 'bbb' has been assigned above the 'bb' category implied score due to the following adjustment reason: sovereign rating (positive).

The asset quality score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reason: collateral and reserves (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 '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.

Public Ratings with Credit Linkage to other ratings

KBANK's GSR is linked to Thailand's Long-Term Foreign-Currency IDR.

ESG Considerations

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, either due to their nature or to 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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