THE SIAM COMMERCIAL BANK
Fitch Ratings has affirmed The
The Outlooks are Stable.
Fitch has also affirmed both entities' Viability Ratings (VRs) at 'bbb', while SCB's and SCBX's Government Support Ratings (GSRs) have been affirmed at 'bbb' and 'bbb-', respectively.
Key Rating Drivers
Driven by VR, Backstopped by Support: SCB's Long-Term IDR and National Ratings are underpinned by the bank's standalone credit profile as indicated by its VR, which is also at the same level as its GSR. The 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 the bank's credit profile relative to other entities rated on our Thai National Rating scale.
Group VR Drives SCBX's Ratings: SCBX's Long-Term IDR, National Long-Term Rating and VR are based on the group's standalone credit profile. SCBX's VR is equalised with the group's consolidated VR, and the VR of the core operating entity, SCB, reflecting our expectation that the holding company will maintain a low common-equity double leverage ratio of below 110% over the medium term. We also expect SCBX's liquidity management to be broadly prudent and resilient to stress scenarios. The holding company is regulated by the
SCBX's Short-Term IDR of 'F3' is at the lower option that maps to the Long-Term IDR, as our assessment of the group's funding and liquidity profile does not meet the criteria requirements for a higher rating.
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 Covid-19 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 to 'bbb' based on the Thai sovereign rating of BBB+, given our view that the sovereign supports market stability.
Sustained Robust Domestic Franchise: The group's business profile is underpinned by SCB, the group's core operating entity. SCB is a leading commercial bank in
Unchanged Risk Profile: The group's risk profile score of 'bbb' reflects expectation of broadly consistent risk controls, with no aggressive changes in underwriting practices. The assessment incorporates our expectations that the group will expand in higher-risk unsecured consumer finance at its non-bank subsidiaries, although these exposures remain relatively small for now. Loan growth was slow during the pandemic, but Fitch expects growth to pick up over the near to medium term, in line with the economic environment.
Stabilising Asset-Quality Risk: Fitch believes asset quality downside risks have decreased, supported by the gradual economic recovery and the group's build-up of reserve coverage buffers (157.9% at end-1Q23). We expect the consolidated impaired loans ratio to remain stable in 2023-2024, on slower new non-performing loan (NPL) formation, improving loan growth and write-offs. The ratio has fallen to 3.9% in 1Q23, and we expect the four-year average to return to below 4% over the next several years.
The asset quality score of 'bbb-' is above the implied 'bb' category score reflecting the group's ability to maintain reserve buffers through the cycle, in addition to a high level of collateralised loans.
Earnings Momentum Continues: Fitch believes group's profitability will continue to improve gradually in 2023-2024, supported by stronger loan growth, wider margins and improved fee income opportunities. Profitability has been improving since 2021, as expected. Furthermore, we expect credit costs to gradually decline due to reduced asset-quality downside risks and an already-strengthened loans reserve buffer. The group's operating profit/risk-weighted assets (OP/RWA) ratio improved to 2.5% in 1Q23 (2022: 2.2%), and Fitch expects the core earnings ratio to remain solidly at 'bbb-' score over the next one to three years.
Sound Capital Buffers: SCBX's capitalisation score of 'bbb+' reflects that its common equity Tier 1 (CET1) ratio of 17.5% at end-1Q23 was the highest among Thai domestic systemically important banks (D-SIB), and should continue to provide a strong buffer against downside risks. Fitch expects SCBX to maintain sound core capitalisation in the medium term, which would be sufficient to support the group's planned expansion in its non-bank subsidiaries.
Strong Deposits Franchise: SCBX's 'bbb' funding and liquidity profile score is underpinned by the solid deposit franchise and robust retail client base of its core bank. SCB has a high portion of low-cost and stable transactional current and savings accounts, which comprised 82% of total deposits at end-1Q23. We believe that SCBX's liquidity profile remains healthy, despite the higher loans/deposits ratio of 96.3% at end-1Q23 (2022: 93.7%), with a liquidity coverage ratio of 218% at end-1Q23 (industry average: 190%).
Systemic Importance: SCBX's and SCB's GSRs are based on the group's systemic importance to the Thai financial system, given SCB's 15% deposit market share. Both are regulated by the
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
IDRs AND NATIONAL RATINGS
SCBX:
SCBX's Long-Term IDR and National Long-Term Rating are sensitive to any changes in our assessment of the group's standalone credit profile as reflected by the VR. A downgrade in the group's VR would lead to a similar action on SCBX's Long-Term IDR and National Long-Term Rating. The rating action on National Ratings would also take into account SCBX's credit profile relative to
An increase in SCBX's common-equity double leverage to above 120% could lead to the holding company's credit profile being assessed below SCB's VR, and hence negative rating action on SCBX's Long-Term IDR and National Long-Term Ratings.
A material decline in SCB's contribution to the group's consolidated credit profile could also lead to a reassessment of notching approach between SCBX and the core operating bank, SCB. For example, a fall in SCB's contribution to the group in terms of asset size to below 75% for a sustained period may indicate rising exposure from non-bank businesses, and could mean that the risk of failure of the bank and of the holding company are no longer strongly aligned.
SCBX's Short-Term IDR could be downgraded to 'B' if its Long-Term IDR were to be downgraded below 'BBB-'. The National Short-Term Rating could be downgraded if the National Long-Term Rating were downgraded below 'AA-(tha)'.
SCB:
Negative rating action on both SCB's GSR and VR would lead to similar action on the bank's IDRs and National Long-Term Rating. SCB's National Long-Term Rating could also be downgraded to 'AA(tha)' if, in Fitch's opinion, its credit profile weakens on a relative basis in the national-rating universe of rated entities in
VIABILITY RATING
SCBX and SCB:
SCBX's and SCB's VR could be downgraded to 'bbb-' if the group's consolidated financial position deteriorates - particularly if by more than what we view as acceptable. This may, for example, arise due to a much weaker operating environment and/or from a deteriorated earnings performance that puts pressure on capital buffers. For example, such stresses may be indicated by the four-year average OP/RWA ratio falling to below 1.5% (currently around 1.9%), the impaired loans ratio increasing to above 6% (currently around 4.3%), combined with other weaker loss-absorption buffers such as the CET1 ratio declining towards 13%.
An increase in SCBX's common-equity double leverage ratio to above 120%, or a significant weakening in SCBX's liquidity management policy, both on consolidated and standalone level, could lead to a wider notching differential between the VRs of SCBX and SCB.
GOVERNMENT SUPPORT RATING
SCBX and SCB:
There could be negative action on the GSR if the government's ability to provide support declines, which could be evident from a downgrade of
There may also be negative rating action if Fitch believes that the government's propensity to provide support to SCB has diminished, for example through a large decline in the bank's level of systemic importance. However, we do not expect any changes in systemic importance in the near to medium term.
SCBX's GSR notching differential may widen if its non-bank businesses expand significantly and alters the shape of the group, or if Fitch reassesses that likely resolution scenarios would lead to substantial differences on how the authorities would treat the bank against the rest of the group. For example, this may arise from stronger indications from the authorities that any support, should it be required by the group, would be focused on the bank only.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
IDR AND NATIONAL RATINGS
SCBX:
An upgrade in the group VR could lead to similar action on SCBX's Long-Term IDR and National Long-Term Rating. The rating action on National Long-Term Rating would also have to take into account the relative creditworthiness of peers rated on the national scale.
SCB:
There could be positive rating action on SCB's IDRs and National Long-Term Rating following similar changes in either its GSR or the group's VR. The rating action on National Long-Term Rating would also have to take into account the relative creditworthiness of peers rated on the national scale.
VIABILITY RATING
SCBX and SCB:
SCBX's and SCB's VR could be upgraded if core metrics improved very significantly, indicated by a consistently better-than-sector financial performance in tandem with no significant increases in risk-taking. This improvement would most likely occur in a significantly stronger operating environment than our expectation, and may be evident in core financial metrics such as the four-year average OP/RWA ratio being above 2.5%, alongside an average impaired loans ratio of less than 3%, combined with the maintenance of other key loss-absorption buffers, such as a CET1 ratio of above 16%. Nonetheless, near-term upside appears limited given the gradual nature of the economic recovery.
GOVERNMENT SUPPORT RATING
SCBX and SCB:
An upgrade of the GSR may be triggered by a similar action on
For SCB, it is unlikely that there would be further positive action on its GSR if the sovereign rating remains unchanged. However, there could be upside to SCBX's GSR if Fitch assessed that regulatory actions towards SCBX and SCB in a resolution scenario would not be significantly different. This may, for example, be indicated by an increase in SCBX's own level of systemic importance independent of SCB.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
SCBX:
SCBX's THB senior unsecured debt and
SCB:
SCB's senior debt represents the bank's unsecured and unsubordinated obligations. The bank's US dollar senior debt and
SCB's Long-Term IDR (xgs) and its senior unsecured long-term notes (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:
SCBX:
A downgrade in SCBX's National Long-Term Rating would lead to a similar action on the rating of the MTN programme and the senior notes. However, the National Short-Term Rating on the MTN programme is unlikely to be downgraded unless SCBX's National Long-Term Rating is downgraded to 'A+(tha)' or below.
SCB:
A downgrade in SCB's Long-Term IDR or National Ratings would lead to a similar action on the rating of the senior debt and MTN programme.
SCB's Long-Term IDR (xgs) and long-term senior unsecured notes (xgs) ratings 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. SCB's Long-Term IDR (xgs), Short-Term IDR (xgs), and long-term senior unsecured notes (xgs) ratings, could be withdrawn if the bank's VR was upgraded, as the bank's IDRs would then be more clearly driven solely by the bank's intrinsic credit profile.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
SCBX:
An upgrade of SCBX's National Long-Term Rating would also lead to an upgrade of the MTN programme and the senior notes. There is no rating upside on the National Short-Term Rating of the MTN programme because it is already at the highest level.
SCB:
An upgrade in SCB's Long-Term IDR or National Ratings would have a similar effect on its senior debt ratings and MTN programme. There is no upside for the National Short-Term Rating of the senior debt because it is already at the highest level on the scale.
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).
The asset quality score of 'bbb-' has been assigned above the 'bb' category implied score for 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 '
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
The GSRs of SCBX and SCB are linked to
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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