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Rating Action:

Moody's takes action on hybrid securities ratings of two Thai banks

07 May 2010

Approximately US$269 million of hybrids affected

Singapore, May 07, 2010 -- Moody's Investors Service has today taken rating actions on the hybrid securities issued by two Thai banks -- Krung Thai Bank (KTB) and TMB Bank (TMB).

These rating actions are in line with Moody's revised Guidelines for Rating Bank Hybrids and Subordinated Debt, published in November 2009.

This concludes the review for possible downgrade that began on November 18, 2009 of the ratings of both banks' perpetual non-cumulative hybrid securities.

The rating outlook for KTB remains negative, while that for TMB remains stable.

The list of the affected securities can be accessed through this link.

<http://v3.moodys.com/viewresearchdoc.aspx?docid=PBS_SF204244>

Prior to the global financial crisis, Moody's had incorporated into its ratings an assumption that support provided by national governments and central banks to support a troubled bank would, to some extent, benefit the subordinated debt holders as well as the senior creditors. The systemic support for these instruments has not been forthcoming in many cases. Moody's revised methodology largely removes previous assumptions of systemic support, resulting in today's rating action. In addition, the revised methodology generally widens the notching on a hybrid's rating that is based on the instrument's features.

RATING ACTION IN DETAIL

The starting point in Moody's revised approach to rating hybrid securities is the Adjusted Baseline Credit Assessment (Adjusted BCA), which reflects a bank's standalone credit strength, including parental and/or cooperative support, if applicable. The Adjusted BCA excludes systemic support.

For KTB, its Adjusted BCA is Ba2 and is one notch higher than its BCA of Ba3 due to parental/government support providing ratings uplift. This reflects some degree of support from the government as its parent -- the bank is 55% government-owned. The incorporation of support for the hybrid is less than that assigned to the bank's deposit ratings. This illustrates our expectation that government support for the bank would reduce, although not eliminate, the risk of a coupon skip.

For TMB, its Adjusted BCA is Ba3 and is in line with its BCA. This bank does not benefit from any parental or systemic support even though it is currently 27% government-owned. In the medium-term, we understand the government may reduce its stake in the bank.

The main features of the hybrid instrument issued by KTB and the way Moody's rates it is as follows:

- The Hybrid Tier 1 Notes are perpetual;

- The issuer can defer any interest payments if it reports both current and retained loss. If it reports a current loss, but no retained loss, payment can only be made upon obtaining approval from the Bank of Thailand. Current loss is defined as consolidated net profit for the immediately preceding semi-annual period ending in June or the immediately preceding annual period ending in December being less than or equal to zero after deducting -- on a pro-forma basis -- interest payments attributable to such fiscal period on the Securties and any other Parity Obligations. Retained loss is defined as consolidated retained earnings for the most recently ended fiscal period being less than or equal to zero;

- Any deferred interest is non-cumulative;

- In liquidation, the Hybrid Tier 1 Notes rank only senior to (i) common stock and (ii) liabilities, if any, of KTB that by their terms rank junior to the Hybrid Tier 1 Notes.

Moody's generally rates non-cumulative preferred securities with optional deferral features and retained loss clauses three notches lower than the Adjusted BCA.

The main features of the hybrid instrument issued by TMB and the way Moody's rates it is as follows:

- The Hybrid Tier 1 Notes are perpetual;

- The issuer can defer any interest payments if it reports a current loss;

- Any deferred interest is non-cumulative;

- In liquidation, the Hybrid Tier 1 Notes rank only senior to common equity;

- Even though TMB's coupon deferrals read as optional, in the instrument's terms and conditions, they have appeared to be more mandatory in practice as the Bank of Thailand (BoT) disallowed the bank to pay coupons in 2007 when it incurred losses;

Moody's notes the effectively strong mandatory deferral features of TMB's securities, and in practice, would typiclly rate it four notches lower than the Adjusted BCA. However, rating the securities four notches below its Adjusted BCA of Ba3 would bring the rating down to Caa1, indicating the likelihood of some loss. We believe a Caa1 rating would overstate the probability of missed payments for TMB's Hybrid Tier 1 Notes, and that a B3 rating better reflects the risks of this hybrid instrument. But in the event TMB's BFSR is upgraded, we would rate its securities four notches lower than its Adjusted BCA to capture the strong net loss trigger and the BoT's strict enforcement of coupon deferrals in accordance with the hybrid instrument's terms and conditions.

The affected securities of the banks are:

- KTB: the Hybrid Tier 1 Notes downgraded to B2 from Baa3;

- TMB: the Hybrid Tier 1 Notes downgraded to B3 from B1.

The last rating actions for KTB and TMB were taken on 18 November 2009 when their perpetual non-cumulative hybrid securities ratings were placed on review for possible downgrade following a change to the rating methodology for hybrid and subordinated debt instruments.

Please visit www.moodys.com to access the following documents for additional information:

- Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt -- November 17, 2009

- Frequently Asked Questions: Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt -- November 17, 2009

KTB, headquartered in Bangkok, reported unaudited total assets of Bt1,540 billion as of end-2009.

TMB, headquartered in Bangkok, reported unaudited total assets of Bt542 billion as of end-2009.

Singapore
Karolyn C. Seet
Asst Vice President - Analyst
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308

Singapore
Beatrice Woo
VP - Senior Credit Officer
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308

Moody's takes action on hybrid securities ratings of two Thai banks
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