MOODY'S LOWERS RATINGS OF SIX MAJOR THAI BANKS AND FINANCIAL INSTITUTIONS -- SENIOR DEBT TO Ba3
New York, 09-10-98 -- Moody's Investors Service lowered the long-term debt and bank financial strength ratings of six Thai banks and financial institutions: Bangkok Bank, Krung Thai Bank, Thai Farmers Bank, Siam Commercial Bank, Thai Military Bank, and Industrial Finance Corporation of Thailand (long-term debt to Ba3 senior, B2 subordinated). The ratings had been placed under review for possible downgrade on July 28, 1998. Moody's also placed the long-term debt and bank financial strength ratings of Bank of Asia on review for possible upgrade, following the acquisition of a majority interest in the bank by ABN AMRO Bank of the Netherlands.
Moody' noted that the stability of Thailand's banking system continues to be undermined by the financial crisis, as escalating loan losses erode banks' capital and earnings. The extreme fragility of the system inevitably threatens even those banks that have raised considerable amounts of new capital this year – Bangkok Bank and Thai Farmers Bank. Even these banks, in the opinion of Moody's, need to import considerable further amounts of capital to fully restore solvency. Other major banks have not increased their capital resources significantly, and as a result their current capital is being overwhelmed by loan losses.
The government's measures to provide public funds for the recapitalisation of the banking system, announced in August, are an important demonstration of its support for the system. The amounts provided for, Bt 300 billion, are, however, unlikely in Moody's opinion to be in themselves sufficient to provide full recapitalisation, and although it is possible that further amounts may be made available, this will be subject to general political support. More significantly, Moody's noted that for the recapitalisation to be effective, the support must actually be utilised and added to the respective banks' resources. At present, it is uncertain whether banks will apply for the Tier 1 capital, given the dilution that existing controlling shareholders would face, and the unwillingness of the government (having exercised regulatory forbearance) to force banks to raise capital closer to what in Moody's opinion would be prudent levels. Tier 2 capital may be more attractive for banks, and may be sought, but in the view of Moody's it does not provide the same quality of capital as does equity. Until the capital raising impasse is resolved, and banks receive additional capital either from government sources or externally, the instability of Thailand's financial system will remain, it will be subject to external shocks from the region and from other emerging markets, and the reconstruction of the Thai economy will be delayed.
In respect of the other Thai banks that have not been able to raise substantial amounts of capital, Moody's noted that Krung Thai Bank has, through the accretion of certain assets (and liabilities) from intervened banks and finance companies, become Thailand's largest bank by assets. Its capital has been somewhat augmented through the absorption of other banks, but by amounts that are insufficient (in Moody's opinion) to support the extent of its asset impairment which results from its own past lending practice. It also now faces the challenge of consolidating and rationalising its constituent activities while operating under the constraints of a government-owned and -influenced public institution. The government has stated its intention to sell Krung Thai Bank to private shareholders within two years, but it is doubtful to Moody's whether, without substantial additional financial resources, and independent professional management, the bank can become a commercially viable and competitive entity.
Moody's noted that Siam Commercial Bank and Thai Military Bank, although with capital and reserve levels seemingly well below those needed to support their escalating levels of delinquent loans, have not been hitherto intervened by the government. The respective controlling shareholders, the Crown Property Bureau, and the military (both individual personnel and their institutions), are important entities in Thai society, and Moody's believes that the regulatory authorities' sensitivity to being seen to be in conflict with these bodies makes intervention less likely. However, with the resources of their controlling shareholders dwindling, and foreign investors uncertain, it is not clear from where the additional funds urgently needed to restore these banks to a stable financial condition will come. Therefore, creditors remain at risk.
Industrial Finance Corporation of Thailand is a specialised financial institution 31% owned by the Thai government. An important development corporation, it plays a significant and generally valuable role in supporting small and mid-sized companies, especially in the less developed areas of Thailand outside Bangkok. Its asset quality, though, is deteriorating in line with its credit exposure to smaller and less resourceful borrowers. It remains a conduit for funding supplied by international agencies, and as a semi-official agency it, together with the much larger Krung Thai Bank, gives the government of Thailand a direct way of accessing and supplying credit to the domestic markets, in competition with the privately-owned commercial banks.
Moody's noted that Bank of Asia's transaction with ABN AMRO Bank of the Netherlands has now been closed and funded, with an injection of Bt 7.5 billion into Bank of Asia's capital base. In return, ABN AMRO Bank receives a 75% ownership interest in Bank of Asia, and is irrevocably committed to making a second payment into the bank's capital in two years' time, at a price related to then-prevailing market conditions. ABN AMRO Bank, rated Aa1 for its long-term debt, is one of the largest banks in Europe as well as, in Moody's opinion, one of the strongest, although the growing expansion and diversification of its franchise, illustrated by its acquisition of Bank of Asia, may lead to somewhat higher balance sheet and business risks. The bank intends to make Bank of Asia its local flagship, handling an expanded middle market and retail banking business. After a troubled history, the current senior management of Bank of Asia successfully reconstructed its business based on aggressive loan collections, and a retail focus. It remains a very small institution, however, and its asset quality, in particular, is severely under pressure in line with the current conditions in the market. Both these issues may well be substantially resolved by the ownership by ABN AMRO Bank.
Moody's review will consider the benefits to Bank of Asia of the new parent's professional expertise, the boosting of local confidence, the additional resources that are now available for investment in systems and Bank of Asia's business expansion, as well as the possibility that ABN AMRO Bank will commit additional capital to support its subsidiary' obligations, if necessary.
The following ratings were affected:
Bangkok Bank -- the long-term debt ratings were lowered from Ba1 (senior) and Ba3 (subordinated) to Ba3 and B2, and the bank financial strength rating from D to E+.
Krung Thai Bank -- the long-term subordinated debt rating was lowered from Ba3 to B2. The bank financial strength rating of E was confirmed.
Thai Farmers Bank -- the long-term subordinated debt rating was lowered from Ba3 to B2, and the bank financial strength rating from D to E+.
Siam Commercial Bank -- the long-term debt ratings were lowered from Ba1 (senior) and Ba3 (subordinated) to Ba3 and B2, and the bank financial strength rating from E+ to E.
Thai Military Bank – the long-term subordinated debt rating was lowered from Ba1 to B2. The bank financial strength rating of E was confirmed.
Industrial Finance Corporation of Thailand – the long-term debt ratings were lowered from Ba1 (senior and subordinated) to Ba3 (senior) and B2 (subordinated).
Bank of Asia – the long-term subordinated debt rating of B3, and the bank financial strength rating of E, were placed on review for possible upgrade.
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