Fitch Ratings has affirmed Krung Thai Bank Public Company Limited's (KTB) Long-Term Issuer Default Rating (IDR) at 'BBB+' and National Long-Term Rating at 'AAA(tha)'.

The Outlooks are Stable. Fitch has also affirmed the bank's Short-Term IDR at 'F1', Government Support Rating (GSR) at 'bbb+' and Viability Rating (VR) at 'bbb-'. A full list of rating actions is below.

Key Rating Drivers

Government Support Underpins Ratings: KTB's IDRs and National Ratings are driven by its GSR, which reflects a high probability of extraordinary support from the Thai government (BBB+/Stable/F1), if needed. KTB's Short-Term IDR is assigned at the higher option, to reflect our view that support propensity is more certain in the near term. The National Long-Term Rating takes into account KTB's support-driven profile relative to other entities rated on the Thai National Rating scale, and denotes the lowest expectation of default risk compared with other entities in the country.

The Stable Outlooks are in line with our Outlook for Thailand's sovereign ratings, and also incorporate our expectation that government support propensity is unlikely to change over the medium term

Systemic Importance, State Ownership: KTB is one of the largest banks in Thailand, with a consistent deposit market share of about 15%-16%, and is classified as a domestic systemically important bank (D-SIB). Even so, Fitch believes that KTB is not a typical D-SIB, as it is the only commercial bank majority-owned by the state. It is controlled by the government, and has worked closely with the state to support policy objectives, such as fund disbursals during the Covid-19 pandemic in 2020-2022. Its GSR of 'bbb+' is therefore one notch higher than the country's private-sector D-SIBs.

Operating Environment Broadly Supportive: Fitch expects that improving GDP growth of 3.7% in 2023, (2022: 2.6%) would help Thai banks' business prospects and borrower repayment ability. Nevertheless, leverage has risen over the course of the pandemic - private sector credit/GDP was 156% at end-2022 - and this 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 based on the Thai sovereign rating of 'BBB+', given our view that the sovereign supports market stability.

Sound Franchise, State Ties: KTB's business profile score of 'bbb' is based on the bank's sustainable scale and franchise. KTB has strong linkages to the state and acts as the main cash management provider to the government, contributing to its sustained solid deposit base. These linkages have helped the bank achieve a significant increase in retail clients during the pandemic through its significant role in supporting government relief measures. The bank has a diverse loan portfolio, which benefits from a significant portion of lower-risk lending to state-related entities and civil servants.

Broadly Unchanged Risk Profile: KTB's risk profile score 'bbb-' incorporates the bank's record of a more-volatile long-term asset quality performance compared to the sector. Nevertheless, we view that the bank's risk framework during the pandemic has remained broadly steady, as its support to the state has been mainly in the form of funds disbursement and lower-risk lending to the government segment, rather than on any policy-related lending to marginal client groups.

Asset Quality Weaknesses Remain: KTB's asset quality score of 'bb+' reflects our view that the impaired loans ratio will remain above 4% (1Q23: 4.3%) and the sector average (3.4%), implying a score in the 'bb' category. KTB has managed down legacy impairments. However, we see some downside risks to KTB's asset quality similar to the sector, given the pandemic-related regulatory forbearance measures on loan classification will expire at end-2023. Even so, the improvement in KTB's loan loss allowance coverage (1Q23: 164%, end-2020: 138%) provides a buffer against further downside.

Improved Earnings: KTB's earnings score has been revised up to 'bbb-' from 'bb+', reflecting our expectation that the operating profit/risk-weighted assets (OP/RWA) ratio will be sustained above 1.5% over the medium term. Profitability has improved since 2019, with 1Q23 OP/RWA at 2.6% (2019: 1.5%). This may not be sustained for the full year, but earnings should continue to be supported by wider margins from the higher interest rate, and stronger loan growth in non-government segments. Downside risk has also decreased, given business volume recovery and reduced credit costs.

Adequate Capital Buffer: KTB's capitalisation score of 'bbb' reflects Fitch's expectation that KTB's common equity Tier 1 (CET1) ratio of 15.9% in 1Q23 will remain a key loss-absorption buffer against unexpected shocks from earnings or asset quality. The CET1 ratio has been above 15% since 2019, supported by gradual earnings retention, moderate dividend payouts and limited growth in RWAs. These levels are sustainable, in Fitch's view.

Franchise Supports Funding Stability: We expect KTB's funding and liquidity to remain stable over the medium term, driven by its robust deposit franchise. The bank's loan/deposit ratio has been slightly higher than that of peers, standing at 99.5% at end-1Q23 against the sector's 92.2%. Nevertheless, the bank's 'bbb' funding score also takes into account KTB's position as the government's main cash management provider, which supports its ability to maintain a steady deposit base.

Current and savings accounts make up over 80% of total deposits, reflecting the bank's sound transactional banking franchise and access to low-cost deposits.

Rating Sensitivities

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

Any negative rating action on GSR would lead to similar action to KTB's Long-Term IDR and National Long-Term Rating. KTB's National Long-Term Rating would also take into consideration KTB's support-driven profile relative to other entities on our Thai National Rating scale.

KTB's Short-Term IDR would be downgraded if its Long-Term IDR is downgraded.

KTB's GSR would be downgraded if the government's ability to provide support deteriorates, which may be indicated by a downgrade of Thailand's Long-Term IDR. The GSR could also be negatively affected by our perception of any deterioration of the government's propensity to support the bank. For example, this may arise from a sharp decline in its systemic importance and deposit market share, or by a substantial decline in the level of state ownership and linkages. However, Fitch sees any change in support propensity as unlikely in the near term to medium term.

KTB's VR could be downgraded to 'bb+' if a combination of the bank's core financial metrics were to worsen substantially, which could occur from a much weaker operating environment. For example, this may be indicated by a decline in buffers, such as a CET1 ratio of below 13% for a sustained period (currently around 15.9%) and loan loss allowance coverage of below 100% combined with a four-year average impaired loans ratio of 6% or more.

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

KTB's Long-Term IDR would be upgraded following similar rating action on the bank's GSR.

KTB's National Ratings are already at the top end of the scale, and there is no upside.

There may be positive rating action on KTB's GSR following a similar action on Thailand's Long-Term Foreign-Currency IDR. However, any such assessment would also have to take into consideration whether Fitch's other assumptions about support propensity remain unchanged.

KTB's VR could be upgraded if there were material improvements in the bank's asset quality, combined with the maintenance of sound loss-absorption buffers and no apparent increases in risk appetite. For example, this could be indicated by a four-year average impaired loans ratio of below 4.0%, combined with sound loan loss allowance coverage and a CET1 ratio above 15%.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

KTB's senior unsecured notes are rated 'BBB+', the same level as its Long-Term IDR, as the instruments represent its unsecured and unsubordinated obligations.

The Basel lll Tier 2 subordinated notes are rated two notches below KTB's National Long-Term Rating, in line with our baseline approach in our criteria, to reflect their higher loss-severity risk compared to senior debt. There is no additional notching for non-performance risk, as the notes do not incorporate going-concern loss absorption, such as coupon omission or deferral features. Fitch uses the government support-driven National Long-Term Rating as the anchor rating for these Tier 2 notes, to reflect our expectation that the state would provide pre-emptive support to KTB prior to the point of non-viability.

KTB's Long-Term IDR (xgs) is at the level of its VR. The Short-Term IDR (xgs) is driven by the Long-Term IDR (xgs), which maps to 'F3(xgs)' under Fitch's criteria. The bank's senior unsecured long-term rating (xgs) is at the same level as the Long-Term IDR (xgs).

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

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

Any negative rating action on KTB's Long-Term IDR would have a similar effect on the bank's senior bonds.

KTB's subordinated debt instruments would face negative rating action following similar action on the anchor rating, the National Long-Term Rating.

KTB's ex-government support ratings are sensitive to changes in the bank's VR. Therefore, a downgrade of KTB's VR would lead to a downgrade of the Long-Term IDR (xgs), Short-Term IDR (xgs) and senior unsecured long-term rating (xgs).

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

KTB's senior notes would be upgraded if the bank's Long-Term IDR was to be upgraded.

The anchor rating for the subordinated notes, the National Long-Term Rating, is at the top end of the scale. So there would be no upside to the subordinated notes unless Fitch assessed that the government would mitigate the loss severity in the event of non-performance, and would therefore warrant one rather than two notches. However, Fitch does not expect any changes in these assumptions in the near term.

KTB's Long-Term IDR (xgs) and senior long-term debt ratings (xgs) could be upgraded if the bank's VR was upgraded, although there would be no rating action on the Short-Term IDR (xgs) unless the bank's funding and liquidity score was also revised up to 'bbb+'.

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 '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

KTB's GSR, IDRs and National Ratings are linked to Thailand's sovereign Long-Term Foreign-Currency IDR.

ESG Considerations

KTB has an ESG Relevance Score of '4' for Governance Structure, due to its role as a state-owned bank, and the potential for the state to affect the bank's risk governance, and ultimately its financial profile, which has a negative impact on the credit profile, and is relevant to the international ratings in conjunction with other factors.

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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