Fitch Ratings Revises TMB to Positive, Affirming IDR at BBB- and NLT Rating at AA-(tha)

Fitch Ratings has revised the Outlook on TMB Bank Public Company Limited’s (TMB) Long-Term Issuer Default Rating (IDR) and National Long-Term Rating to Positive from Stable and affirmed the ratings at ‘BBB-‘ and ‘AA-(tha)‘, respectively. At the same time, Fitch has placed TMB’s Support Rating (SR) and Support Rating Floor (SRF) on Rating Watch Positive (RWP).

The rating actions follow TMB’s announcement on 8 August 2019 that it plans to merge with Thanachart Bank Public Company Limited (TBANK). The bank expects the transaction to be completed in December 2019.

 

According to the plan, TMB will purchase all of TBANK’s shares from its current shareholders at an estimated cash value of THB130 billion. TMB expects up to THB106.5 billion (or about 80% of the estimated value) to be financed by capital raising through newly issued shares, which will include capital injections of THB42.5 billion from TMB’s current shareholders.

The merger agreement will also include TBANK’s major shareholders using part of the proceeds from the sale of the bank’s shares to purchase up to THB57.6 billion of TMB’s newly issued shares. The remaining funding requirement of about 20% would be financed by market issuance (subordinated debt and additional Tier 1 instruments).

TMB’s three major shareholders after the merger would be ING Bank N.V. (AA-/Stable) with 21.3%, Thanachart Capital with 20.4% and Thailand’s Ministry of Finance with 18.4%. The integration process will start after the transaction is completed in December 2019 and the entire business transfer is intended to be completed by 2H21.

 

TMB is Thailand’s seventh-largest bank by deposits, with a market share of about 5% at end-2018, while TBANK is the sixth-largest bank with deposit market share of about 6%. The combined bank should still rank sixth, but Fitch Ratings believes the authorities are more likely to regard the bank as systemically important among domestic institutions.

 

KEY RATING DRIVERS – IDRS, NATIONAL RATINGS AND SENIOR DEBT

TMB’s IDRs, National Ratings, and senior debts ratings are driven by the bank’s standalone profile, which Fitch captures in its Viability Rating (VR). The Positive Outlook on the ratings is consistent with Fitch’s view that a merger could lead to a stronger standalone credit profile over the next 18-24 months through a meaningful improvement in the company profile.

The senior debt ratings are equalized with the Long-Term IDR as they represent unsecured and unsubordinated obligations of the bank.

 

VIABILITY RATING

There are some execution risks to completing the merger, but Fitch believes there is a limited downside to the merger as TMB and TBANK have similar financial strengths and somewhat complementary business operations, including target markets.

The revision of the Outlook is driven by our expectations of positive developments in TMB’s credit profile after the merger, particularly the bank’s company profile and funding. TMB would have a stronger domestic franchise and greater business-model diversification after the merger. TBANK’s strengths in auto hire purchase complement TMB’s existing client segments. A much larger and more diversified deposit base should also provide greater stability to TMB’s funding profile over the medium term, similar to higher-rated and systemically important banks in Thailand.

Fitch Ratings also expects the merger to have a positive impact on TMB’s other rating factors such as risk appetite, asset quality, and earnings and profitability. However, it may take more time to ascertain the materiality of the impact on these factors.

 

SUPPORT RATING AND SUPPORT RATING FLOOR

The RWP on TMB’s SR and SRF reflect potential rating upside from TMB’s increase in systemic importance to Thailand’s financial system after the merger. TMB’s size and deposit market share would approach those of other banks in the system that Fitch believes are systemically important. In our view, this could lead to the authorities imposing higher minimum prudential standards on the bank to reduce the risk of failure, but Fitch Ratings also believes this is likely to increase the Thai government’s propensity to support TMB, if needed.

 

SUBORDINATED DEBT

TMB’s Basel III Tier 2 subordinated notes are rated one notch below the bank’s National Long-Term Rating, reflecting higher loss severity risks relative to senior debt instruments and a lack of mandatory full write-down features.

 

RATING SENSITIVITIES – IDRS, NATIONAL RATINGS AND SENIOR DEBT

TMB’s IDRs, National Ratings and senior-debt ratings are sensitive to changes in the bank’s Viability Rating.

 

VIABILITY RATING

The VR could be upgraded if Fitch sees greater evidence that TMB’s domestic franchise has strengthened, its business model has improved and that these factors are likely to lead to sustained improvement in its overall financial strength over the medium-to-longer term. The prospects would be enhanced by a well-executed post-merger integration without any loosening of the bank’s risk underwriting standards to support profitability in a lower-growth yet competitive market. In Fitch’s view, an improved company profile should also manifest in a more competitive position, which would enhance structural improvements in its financial performance, such as earnings and funding.

However, the Outlook could be revised to Stable if Fitch believes that a material and sustained improvement in TMB’s key financial metrics is unlikely to occur over the medium term. For example, this could arise from failure to properly address the complexities and challenges of integrating the two banks’ operations and cultures, including the bank failing to obtain material financial and operational benefits from the merger despite its larger franchise.

 

SUPPORT RATING AND SUPPORT RATING FLOOR

The SR and SRF could be upgraded if the merger is completed as planned with all regulatory, legal, and operational hurdles passed.

 

SUBORDINATED DEBT

The subordinated debt ratings of TMB are broadly sensitive to the same factors affecting their National Long-Term Ratings.

 

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 – 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.