Fitch Ratings has affirmed Bangkok Bank Public Company Limited’s (BBL) Long-Term Issuer Default Rating (IDR) at ‘BBB+‘ and National Long-Term Rating at ‘AA+(tha)‘ with a Stable Outlook following the bank’s announcement of its plan to acquire an 89% stake in Indonesian-based PT Bank Permata Tbk (AAA(idn)/Rating Watch Negative). The transaction is still subject to shareholder and regulatory approval. BBL expects the deal to be completed in 3Q20.
Key Rating Drivers
The IDR and National Rating are driven by BBL’s Viability Rating, which reflects the bank’s standalone credit profile. The affirmation and Stable Outlook reflect Fitch’s view that the proposed acquisition will not significantly alter BBL’s credit profile.
However, this transaction does signal an aggressive increase in BBL’s risk appetite and tolerance for lower risk-absorption buffers. The scale of the proposed acquisition will comprise around 9% of BBL’s pro forma assets and the bank’s core capitalisation, historically a rating strength, is likely to weaken. Its common equity Tier 1 ratio may fall to 14.5%, from 17.7%, based on pro forma accounts as of end-September 2019, but existing buffers, such as its reserve coverage ratio and liquidity position, should remain and support its standalone credit profile post-acquisition.
The proposed acquisition is in line with BBL’s strategic aspiration of being a leading regional bank with a larger presence in key south-east Asian markets. Fitch believes BBL is better positioned than other Thai banks for international growth due to its expertise in international banking; offshore activities make up around 17% of total loans. Nevertheless, the deal’s size and complexity involves significant execution risk and it may take time for BBL to realise synergies and benefits to enhance earnings.
BBL is one of the better-capitalised Thai banks. Its ability to generate sufficient earnings and the bank’s dividend payout policy will determine whether it can rebuild its core capital buffers, which are likely to be eroded by the proposed acquisition.
Fitch will observe BBL’s risk appetite and capitalisation for signs of larger-than-expected deterioration. For example, further significant expansion into riskier offshore assets that compromises BBL’s risk standards could lead to negative rating action. Furthermore, a significant deterioration in performance that drags down core ratios in asset quality and capitalisation could also trigger a downgrade.
There is limited rating upside, particularly as BBL’s IDRs are at the same level as the Thai sovereign (BBB+/Positive).