MOODY'S LOWERS LONG-TERM DEBT, DEPOSIT, AND FINANCIAL STRENGTH RATINGS OF BANK OF AYUDHYA, SIAM CITY BANK, AND THAI MILITARY BANK
Hong Kong, 04-25-97 -- Moody's Investors Service lowered the long-term ratings of three Thai banks: Bank of Ayudhya (BAY), Siam City Bank (SCIB), and Thai Military Bank (TMB). The short-term ratings for Bank of Ayudhya and Thai Military Bank were also downgraded. Moody's said that its action reflects the deterioration in the asset quality of the three banks and the anticipated impact that Thailand's weakening financial fundamentals, declining property and stock markets, deepening crisis in the finance company sector, and continuing economic slowdown will have on the three banks' asset quality, capital levels, and profitability.
Moody's said that the long-term senior debt and deposit ratings of BAY were lowered from Baa1 to Baa2, BAY's subordinated debt was lowered from Baa2 to Baa3, BAY's short-term deposit rating was lowered from Prime-2 to Prime-3, and its Bank Financial Strength Rating was lowered from D+ to D.
The rating agency said that the long-term senior debt and deposit ratings of SCIB and TMB were lowered from Baa2 to Baa3, the subordinated debt of SCIB and TMB were lowered from Baa3 to Ba1, the Bank Financial Strength Rating of SCIB and TMB were lowered from D to E+, and TMB's short-term deposit rating was lowered from Prime-2 to Prime-3. The short-term deposit rating of Prime-3 assigned to SCIB was confirmed.
Moody's noted that many Thai banks are suffering from a sharp decline in their financial fundamentals. The country's economic slowdown has had a significant impact on the asset quality of the banking sector. Furthermore, Moody's expects the levels of non-performing assets for the three banks to rise by another 50% to 100% over the year-end 1996 levels. This will translate into a weakening in the levels of unimpaired capital of the banks. Moody's also anticipates that the profitability of the Thai banks will be under substantial pressure for the near term.
Moody's added that the problems in the property sector are likely to continue for the next several years. The current stock of property, coupled with the new supply coming on the market in 1997 and 1998, exceeds anticipated demand by a significant margin. Furthermore, the high domestic interest rates, which are being used to protect the baht by the Bank of Thailand (BOT) are compounding the problems for the property sector.
The finance company sector, which appears to be more troubled than are most of the commercial banks, is also a contingent liability for the three banks. Furthermore, the BOT is likely to look to the banks to be the "first line of defense" to provide financial support for their affiliate finance companies should they experience funding and capital deficiencies. Thus, the banks' "contingent liability" is likely to translate into actual financial obligations for the banks.
Liquidity for the financial system remains tight. The Thai banks, including BAY, SCIB, and TMB, generally have high loan-to-deposit ratios in excess of 100%, often with external financing of short-term debt. In the current environment, the Thai financial market is experiencing a "flight to quality" with the larger banks and the government-related institutions being the main beneficiaries.
Moody's noted that the Thai regulators have announced a series of measures to encourage mergers in the financial sector as well as more stringent disclosure and provisioning requirements for financial institutions. In Moody's view, these recent measures are a step in the right direction but more rigorous requirements and enforcement will be necessary to restore confidence in the regulation and supervision of Thai banks.
Moody's said that the transparency of Thai financial statements is generally poor. Thai banks are allowed a degree of regulatory forbearance in such items as the need to create loan loss reserves and regarding the non-accrual of loans. Furthermore, Thai banks do not currently disclose their level of non-performing loans, although the BOT has announced that it will require banks to disclose information regarding asset quality with their June 30, 1997 financial statements. The BOT did disclose, however, that as of June, 1996, the NPL level of Thai banks stood at 7.7%.
Moody's said that Thai banks benefit from good lending margins --systemwide, the average is more than 3.5%--and a supportive regulatory environment. These factors will help the banks generate the core profits to absorb the potential losses which may materialize as well as maintain confidence in the banking sector. Furthermore, Thailand still enjoys strong underlying fundamentals. Foreign direct investment, attracted by the country's liberal trade and investment regimes and its favorable geographic location, continues to take place and to drive Thailand's still robust rate of economic growth. In addition, such investment should be leading to technology transfers and to Thailand's ascent up the higher valued-added ladder of production. Economic policy-making, though under some constraint, is guided by a conservative technocratic elite while a large cushion of foreign exchange reserves does provide some additional flexibility to weather severe shocks.
The following ratings were lowered :
Bank of Ayudhya: the long-term deposit and senior debt rating from Baa1 to Baa2, the subordinated rating from Baa2 to Baa3, the short-term deposit rating from Prime-2 to Prime-3, and the Bank Financial Strength Rating from D+ to D.
Siam City Bank: the long-term deposit and senior debt rating from Baa2 to Baa3, the subordinated rating from Baa3 to Ba1, and the Bank Financial Strength Rating from D to E+.
Thai Military Bank: the long-term deposit and senior debt rating from Baa2 to Baa3, the subordinated rating from Baa3 to Ba1, the short-term deposit rating from Prime-2 to Prime-3, and the Bank Financial Strength Rating from D to E+.
The following rating is confirmed:
Siam City Bank --The Prime-3 rating on the bank's short-term deposits.
Moody's said that all three banks are based in Bangkok.
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