Fitch Ratings has affirmed Bangkok Bank Public Company Limited's (BBL) 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 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: The 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. The Short-Term IDR is at the higher option of 'F2', given BBL's funding and liquidity score of 'bbb+'. The National Long-Term Rating also takes into account relativities within Thailand's 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 2023 (2022: 2.6%) to help 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 -raising downside risks should economic prospects unexpectedly deteriorate. The implied operating environment (OE) score is in the 'bb' category, but Fitch applies a positive adjustment to 'bbb' based on the Thailand sovereign rating (BBB+/Stable), as Fitch believes the sovereign supports market stability.

Leading Domestic Corporate Banking Franchise: BBL's business profile score of 'bbb+' is above the OE score. This reflects its robust universal banking franchise and business model diversity, which Fitch believes gives BBL a sustainable competitive advantage and supports its ability to generate sustainable profit through the cycle, while controlling risk. BBL has particular strengths in large corporate banking and international banking; it has the largest overseas presence among Thai banks, providing greater geographical diversification and supporting its ability to offer cross-border financial services to clients.

Consistent Risk Profile: BBL's risk profile score of 'bbb' reflects Fitch's view that the bank has a long record of generally prudent underwriting standards, provisioning policy and risk monitoring relative to domestic peers. The score also incorporates varying risks over the economic cycle, in line with changes in the bank's growth strategy.

Stable Asset Quality: Fitch expects post-pandemic pressure to weigh on impaired loans (1Q23: 3.7%), but to stay manageable, particularly given BBL's focus on large corporate clients that are more resilient to economic conditions and its smaller exposure to SME and unsecured retail. BBL's loan loss allowance coverage has remained consistently above that of peers (1Q23: 255%, sector average: 174%) and its asset quality score of 'bbb-' is above the implied 'bb' category score, reflecting a sound level of provisioning that mitigates downside risk.

Improving Prospects for Profitability: The operating profit/risk-weighted assets (OP/RWA) ratio rose to 1.7% in 1Q23, from a low of 0.8% in 2020, and Fitch believes this improvement is sustainable. Interest income is benefiting from recent rate hikes and ongoing loan growth, and Fitch expects reduced provisioning requirements over the next two years to support operating profit. The earnings and profitability score of 'bbb-' is above the implied 'bb' category score, reflecting Fitch's expectation that the profitability recovery will continue through to 2024 and that the weak figure in 2020 was affected by non-recurring costs related to the acquisition of Indonesia-based PT Bank Permata Tbk.

Rebuilding Capital Buffers: BBL's capitalisation and leverage score of 'bbb+' reflects Fitch's view that the bank will rebuild its common equity Tier 1 (CET1) ratio back up to the 16%-17% range, supported by improving earnings prospects and moderate dividend payouts. The deduction of goodwill from the Permata acquisition, and earnings disruption caused by the pandemic, has meant that the CET1 ratio as of end-March 2023 of 14.9% remains low compared to BBL's target and historical record.

Relatively Sound Funding Profile: BBL's funding and liquidity score of 'bbb+' reflects its relatively conservative liquidity management policy and stronger-than-peer liquidity ratios. Its loan/deposit ratio of 82.7% (1Q23) is consistently well below the sector average of 92.2%. The bank's liquidity coverage ratio is also consistently high, and was 271% at end-2022 (sector: 192%), reflecting high holdings of liquid assets.

GSR Reflects Systemic Importance: The GSR reflects BBL's status as one of Thailand's largest banks; it is designated as one of the country's six domestic systemically important banks (D-SIBs) by the Bank of Thailand, due to its significant scale and financial system linkages. Fitch views BBL is a typical D-SIB in the market and does not expect its major presence in Thailand to change. BBL has a domestic deposit market share of 16% and a diverse client base. Fitch believes there is a high probability of extraordinary support as the sovereign has the ability and propensity to support systemically important institutions.

Rating Sensitivities

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

Negative action on the Long-Term IDR and National Long-Term Rating would be taken only if both the GSR and VR are downgraded. The National Long-Term Rating could also be downgraded to 'AA(tha)' if, in Fitch's opinion, the bank's credit profile weakens relative to entities rated on the Thai national scale.

The Short-Term IDR would be downgraded if the Long-Term IDR is downgraded to 'BBB-'.

The VR could be downgraded to 'bbb-' if there is a significant deterioration in multiple key financial indicators, which could reflect a weaker OE or indicate that BBL's risk profile are weaker than Fitch had anticipated. Such stresses may be indicated by a four-year average impaired loan ratio of 6% or higher (currently around 4%), combined with weaker loss-absorption buffers, such as a CET1 ratio at below 13% and loan-loss coverage ratio at below 120% or not sustaining the OP/RWA ratio above 1.5%.

There could be negative action on the GSR if Thailand's Long-Term Foreign-Currency IDR is downgraded, which would indicate the government's reduced ability to support systemically important banks. A diminished propensity by the government to support BBL 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, Fitch believe there are limited prospects of a weaker government propensity to support BBL over the medium term.

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

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

The VR could be upgraded to 'bbb+' over the long-term should successful execution of strategies lead to a sustained improvement in the bank's financial performance without weakening its risk profile. This would be likely to reflect a stronger OE, contributing to meaningful and sustainable improvements in core financial metrics, such as the average OP/RWA ratio being above 2.5% and the 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%.

The GSR may be upgraded following a similar action on Thailand's Long-Term Foreign-Currency IDR, although any upward revision of the GSR would also need to consider whether the government's propensity to support systemically important banks remains intact at the higher rating level.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

BBL's senior debt is rated at the same level as the bank's Long-Term IDR, as it represents BBL's unsubordinated and unsecured obligations.

BBL's Tier 2 subordinated notes, which includes legacy Tier 2 notes and Basel III compliant Tier 2 notes, are rated two notches below the anchor rating, the VR, to reflect loss-severity risk compared with senior instruments. While the legacy Tier 2 notes do not define a point of non-viability, Fitch believes the potential loss would be comparable with the Basel III compliant instruments, due to their similar priority of claims. There is no additional notching for non-performance risk, as the notes do not incorporate going-concern loss-absorption features. The notching is in line with Fitch's criteria baseline approach to rating similar subordinated debt instruments.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

BBL's senior debt would be downgraded if there is negative rating action on the anchor rating; the Long-Term IDR.

The Tier 2 subordinated notes would be similarly affected by negative rating action on the bank's VR.

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 BBL's Tier 2 subordinated debt instruments following similar action on the VR.

VR ADJUSTMENTS

The OE 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).

The earnings and profitability score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reason: historical and future metrics (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

BBL's GSR is linked to the Thai sovereign'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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