Five state banks get high marks from Fitch, reflecting support

Fitch Ratings has affirmed ratings for five Thai state banks: Bank for Agriculture and Agricultural Cooperatives (BAAC), ExportImport Bank of Thailand (Exim), Government Housing Bank (GHB), Islamic Bank of Thailand (IBank) and Small and Medium Enterprise Development Bank of Thailand (SME Bank).

The affirmations reflect Fitch’s view that the banks would benefit from a high probability of state support if needed.

Exim’s issuer default rating (IDR) and senior debt rating are at the same level as that of the sovereign (BBB+/stable/F2). The national long-term ratings of BAAC, Exim, GHB and SME Bank are affirmed at AAA, the highest rating possible.

The ratings are based on the banks’ close state ties, legal status as state policy banks, full or near-full direct ownership by the Finance Ministry and a consistent record of financial support.

Earnings performances for BAAC, Exim and GHB have been sound over the past several years, and support from the state has not been required.

But SME Bank’s weak financial position caused it to undergo a government-sponsored rehabilitation programme, which it left in January 2018. The bank has seen improving financial indicators, such as asset quality, liquidity and capitalisation, though it has continued to underperform BAAC, Exim and GHB on these measures.

IBank’s long-term IDR is two notches below that of the sovereign, while its national long-term rating is at AA. Fitch said the different rating indicates that the bank is more limited and less permanent in terms of policy presence and importance.

Fitch said the Finance Ministry and the government have little intention to hold a majority stake (direct or indirect) in IBank for the long term and have lately been trying to find new equity partners. Restructuring could improve the bank’s prospects.

A change to Thailand’s sovereign rating could affect Exim’s and IBank’s IDRs, and support rating floors and Exim’s senior debt rating. But it would be unlikely to affect the national ratings assigned to BAAC, Exim, GHB and SME Bank, as the Thai sovereign’s default risk would still be considered the lowest in the country.

There could still be an impact on IBank’s national ratings if the sovereign rating change led to a reassessment of the relative credit risk of entities on a national scale.

Fitch could downgrade these banks’ ratings if the sovereign reduces its likelihood of supporting the banks. This may happen if the state drastically cuts its shareholding or if the banks change their legal status. But Fitch said this event is unlikely in the medium term, particularly for BAAC, Exim, GHB and SME Bank.