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Rating Action:

Moody's changes outlook on Krung Thai Bank's D- BFSR to stable

09 Jun 2010

Singapore, June 09, 2010 -- Moody's Investors Service has today changed the outlook on the "D-" bank financial strength rating ("BFSR"), the A3/Prime-1 long-term/short-term local currency deposit ratings and the B2 foreign currency Hybrid Tier 1 rating of Krung Thai Bank ("KTB") to stable from negative.

There is no change to the negative outlooks on the bank's foreign currency deposit ratings of Baa1/Prime-2 which follow Thailand's sovereign rating outlook.

"The change in the outlook to stable from negative follows the improvement in KTB's overall financial fundamentals and Moody's expectation that the bank will remain resilient during the current domestic political turmoil, given the recovery in the global environment and the country's export sector," says Karolyn Seet, a Moody's AVP/Analyst.

While KTB complies with the Bank of Thailand's regulatory requirements on capitalisation, the bank's economic solvency has been kept lower than its global peers by lingering problem loans. Under Basel II standards, KTB's core capital ratio rose to 10.1% as of December 2009 from 9.7% a year ago, mainly attributable to improved core earnings which should be adequate to support the bank's current BFSR of D-.

On a pre-provision basis, KTB's earnings generation compares favorably to similarly-rated Thai banks. In addition, its liquidity position is comfortable as evidenced by an 89% loan-to-deposit ratio and the fact that its sizable deposit base accounted for nearly 90% of its funding at the end of 2009. These franchise strengths support KTB's current ratings, though the pricing of, and intense competition for funding will constrain the broader Thai banking sector's growth and profitability.

Impairment charges on lending have been, and are expected to continue to be, much smaller than expected in Moody's previous scenario analysis. The recovery of the Thai economy, particularly in terms of the export sector, more than offsets the potential negative impact on loans to the tourism sector resulting from the recent wave of political unrest and violence.

However, the BFSR remains constrained by KTB's large single-name customer concentrations and low loan loss reserves which undermine its economic capitalization, in light of Thailand's ongoing political problems.

In addition, at the end of 2009, KTB's non-performing loans ("NPLs") improved slightly to 7.9% of the bank's gross loans, from 8.2% at the end of 2008. However, despite KTB continuing to build its loan loss reserves to 47%, they remain below its peers meaning additional elevated provisioning is likely to be necessary in the coming quarters.

The stable rating outlook incorporates Moody's opinion that despite the bank's BFSR carrying a stable outlook, higher credit charges could weaken it, while Moody's expects that its asset quality will also come under growing pressure. However, even if KTB's credit costs climb above Moody's current expectations, its capital position should not deteriorate dramatically.

KTB's ratings have limited upside potential in the short term. However, the following factors could add upward pressure to the rating: (i) continued diversification of KTB's business away from corporate lending to retail banking; (ii) capital adequacy maintained such that its Tier 1 ratio is above 10%; and (iii) its NPL ratio falling below 3%.

Additionally, declining concentration in the bank's loan book would improve its risk profile. Such a development would reduce the vulnerability of the bank's profitability and capitalisation to a sharp asset quality correction and a loss of major customers, including those related to the bank.

Conversely, the stable outlook on the ratings could change to negative if the (i) difficult operating environment in Thailand worsens and KTB's asset quality deteriorates in the coming months; (ii) the bank's profitability declines such that its pre-provision profits as a percentage of risk-weighted assets fall below 1.5%; and/or (iii) the bank's capital adequacy or liquidity declines significantly such that Tier 1 ratios fall below 7% and loan-to-deposit ratios rise above 100%.

Moody's last rating action with regard to KTB was taken on May 7, 2010 when its Hybrid Tier 1 Notes were downgraded to B2 from Baa3.

The principal methodologies used in rating KTB were "Bank Financial Strength Ratings: Global Methodology" (February 2007) and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" (March 2007), which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab.

Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

KTB, headquartered in Bangkok, reported total assets of Bt1,544 billion (approximately US$46.3 billion) as at the end of 2009.

Singapore
Karolyn C. Seet
Asst Vice President - Analyst
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 3758-1350
SUBSCRIBERS: (65) 6398-8308

Singapore
Beatrice Woo
VP - Senior Credit Officer
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 3758-1350
SUBSCRIBERS: (65) 6398-8308

Moody's changes outlook on Krung Thai Bank's D- BFSR to stable
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