Fitch Ratings has affirmed TMBThanachart Bank Public Company Limited's (TTB) 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 Government Support Rating (GSR) at 'bbb', Viability Rating (VR) at 'bbb-' and Short-Term IDR at 'F2'. A full list of rating actions is at the end of this commentary.

Key Rating Drivers

Government Support Underpins Ratings: The IDRs and National Ratings are driven by TTB's GSR, which is based on the bank's systemic importance. The Short-Term IDR is assigned at the higher option of 'F2', as support prospects are more certain in the near term. The National Ratings also take into account the bank's support-driven credit profile relative to other entities rated on the Thai national scale. The Stable Outlook is consistent with the Outlook on the Thailand sovereign's ratings (BBB+/Stable) and also reflects our view that the state's support propensity is unlikely to change in the near term.

Systemic Importance, Government Ties: The GSR reflects TTB's status as one of Thailand's six domestic systemically important banks (D-SIBs), as designated by the Bank of Thailand, due to its significant scale - with a domestic deposit market share of 8% -- and financial system linkages. We also take into account the Ministry of Finance's minority ownership in TTB, although this is not an overriding factor for the bank's GSR. We believe there is a high probability of extraordinary support, as the government has the ability and propensity to support systemically important institutions.

Operating Environment Broadly Supportive: We expect that improving GDP growth of 3.7% in 2023 (2022: 2.6%) will 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 -leading to downside risks should economic prospects unexpectedly deteriorate. The implied operating environment (OE) score is in the 'bb' category, but we apply a positive adjustment to 'bbb' based on the Thai sovereign rating, as we believe the sovereign supports market stability.

Franchise Growth Hurt by Pandemic: We have revised our outlook on TTB's 'bbb-' business profile score to stable, from positive, as the unfavourable OE has limited growth opportunities by more than we expected, and there is a large gap in terms of scale, franchise and business model between TTB and Thailand's other major banks. Despite an improving trend, we forecast TTB's total operating income to remain at the lower end of the benchmark's implied 'bbb' category score and significantly below that of peers.

Unchanged Risk Profile: TTB's lending has been limited over the past several years, due to the bank's balance-sheet optimisation strategy and the challening economic environment caused by the pandemic. The risk profile score of 'bbb-' also incorporates TTB's lower portfolio diversification by product segments compared with that of major bank peers. We expect the bank's underwriting standards to remain broadly unchanged in the near term.

Stable Asset-Quality Outlook: TTB's asset-quality factor score of 'bbb-' reflects our expectation that its impaired loan ratio (1Q23: 3.1%) will stay broadly stable, despite some near-term pressure from the expiry of regulatory forbearance measures at end-2023. Asset quality should be supported by Thailand's economic recovery and TTB's below-peer loan growth over the past three years. The improving revenue outlook and strengthening reserve coverage of 140% at end-1Q23 (2021: 128%) further buffers against write-offs and downside risk.

Scope for Earnings Improvement: TTB's earnings and profitability score of 'bb+' reflects relatively weak profitability over the course of the pandemic compared with peers. Nevertheless, profitability has been improving, with the operating profit/risk-weighted assets (OP/RWA) ratio rising to 1.8% in 1Q23 (2022: 1.5%, 2021: 1.0%), supported by the rising interest rate environment, better efficiencies and lower credit costs. We expect the environment to stay more supportive of earnings over the next two years and for TTB's performance to accelerate and narrow the gap relative to higher-rated domestic peers.

Strengthening Capital Buffers: We have revised up TTB's capital and leverage score to 'bbb', from 'bbb-', to reflect its improved common equity Tier 1 (CET1) capital ratio of 15.7% at end-1Q23 (2021: 14.4%), which is more in line with peers. We expect the bank to sustain the ratio at above 15.0%, supported by earnings retention from stronger profitability and moderate growth in RWAs.

Steady Deposit Base: TTB's funding score of 'bbb-' reflects its broadly stable funding profile, supported by its domestic franchise as Thailand's sixth-largest bank. Its loan/deposit ratio declined slightly to 97.4% in 1Q23 (2022: 98.9%, 2021: 103.0%), due to stronger deposit growth as the bank started to lock-in low deposit rates, along with slow loan growth. However, the ratio remained above the industry average of 92.2%. The liquidity-coverage ratio remained healthy throughout the pandemic and was 199% at end-1Q23 (preliminary), slightly higher than the industry's 190.4%.

Rating Sensitivities

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

IDRs and National Ratings

Negative action on the GSR could lead to similar action on the IDRs and National Long-Term Rating. The National Long-Term Rating could also be reassessed on any perceived weakening relative to the universe of entities rated on the Thai national scale.

GSR

There could be negative action on the GSR if the government's ability to provide support declines. This may, for example, happen if we downgrade Thailand's Long-Term Foreign-Currency IDR or if we believe that the state has reduced its propensity to provide support to TTB, such as through a large decline in the bank's perceived level of systemic importance - for instance, no longer being designated as a D-SIB - or significant regulatory changes.

VR

The VR could be downgraded if TTB's core financial metrics deteriorate significantly, most likely as a result of sharp and sustained economic deterioration.

This may be indicated by a four-year average impaired-loan ratio of above 6%, a loan-loss coverage ratio of below 100% (end-1Q23: 140%) and an average OP/RWA ratio of below 1.0% over the next two or more years. A failure to maintain sufficient capital buffers against asset-quality risks, as indicated by a CET1 ratio consistently below 13.0%, could also be negative for the VR.

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

IDRs and National Ratings

There could be positive rating action on the Long-Term IDR and National Long-Term Rating if there were similar changes in the GSR. Any rating action on the National Rating would also take into account TTB's credit profile relative to other entities on the Thai national scale.

GSR

An improvement in the sovereign's ability to provide support to TTB, such as reflected in an upgrade of the sovereign rating, may prompt an upgrade of the GSR, as long as other support propensity assumptions remain unchanged. Should the sovereign rating remain unchanged, it is unlikely that there would be further positive action on TTB's GSR.

VR

The VR could be upgraded upon evidence that TTB's domestic franchise has strengthened significantly in a way that also leads to a sustained improvement in operating efficiency, earnings generating capacity and overall financial strength to levels that are more comparable with those of higher-rated domestic peers. For example, an average impaired loan ratio at below 2.7%, combined with an average OP/RWA of above 2.5% without a meaningful change in risk appetite and a maintenance of sound CET1 buffers comparable with peers over the medium term.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

The senior debt ratings are equalised with the Long-Term IDR, as they represent the bank's unsecured and unsubordinated obligations.

The Basel III Tier 2 subordinated Thai-baht notes are rated two notches below the implied national rating of TTB's standalone credit profile, which is the anchor for the notes. The notching represents loss severity risk and is consistent with our criteria baseline, as we believe the notes have poorer recovery prospects than senior unsecured instruments. There is no additional notching for non-performance risks, as the notes do not incorporate going-concern loss absorption, such as coupon omission or deferral features. In line with other Basel III Tier 2 issuances in Thailand, the non-viability trigger is defined as emergency capital assistance from the central bank or other empowered government agency.

TTB's ex-government support IDRs and senior debt ratings are driven by its standalone credit profile, as reflected in the VR. The Short-Term IDR (xgs) is mapped from the Long-Term IDR (xgs) to 'F3(xgs)', in line with our criteria.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of TTB's Long-Term IDR would lead to a downgrade of the senior debt ratings.

The rating on TTB's Basel III Tier 2 subordinated debt is sensitive to any changes in TTB's standalone credit profile, which is reflected in its VR. Therefore, a downgrade of the VR may lead to a downgrade of the subordinated debt, although we would also take into account relativities on the Thai national scale.

A downgrade of the VR would lead to a downgrade of the Long-Term IDR (xgs), Short-Term IDR (xgs) and ex-government senior debt ratings.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of TTB's Long-Term IDR would lead to an upgrade of the senior debt ratings.

The rating on the Basel III Tier 2 subordinated debt could be upgraded if the VR is upgraded, while also taking into account relativities on the Thai national scale.

An upgrade of the VR would lead to a withdrawal of the Long-Term IDR (xgs) and ex-government senior debt ratings, as the ratings would no longer be support driven. However, the Short-Term IDR (xgs) may remain unchanged unless the bank's funding and liquidity score is also assessed at 'bbb+' or its VR is upgraded to 'bbb+'.

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).

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

The IDRs, GSR, National Ratings and senior debt ratings are linked to Thailand's sovereign ratings.

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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