Moody's possible downgrade due to change in criteria

Deputy governor Bandid Nijathaworn said Moody's has placed on review the debt and deposit ratings of commercial banks of countries throughout the world whose sovereign credit rating is lower than "AAA".

The move was not targeted at only Thailand but other countries as well and for the same reason.

Moody's on Wednesday placed on review for possible downgrade the debt and deposit ratings of Bangkok Bank (BBL), Bank of Ayudhya (BAY), ExportImport Bank of Thailand (EXIMT), Government Housing Bank (GHB), Kasikornbank (KBank), Krung Thai Bank (KTB), Siam City Bank (SCIB), Siam Commercial Bank (SCB), Standard Chartered Bank Thailand (SCBT), TMB Bank (TMB) and United Overseas Bank Thailand (UOBT).

The central bank stressed that public debt was low and the banking system was sound, with its capital adequacy ratio as high as 14.9 per cent. The industry has performed impressively even though the economy has nosedived for two straight quarters.

The cost of funds of the nine commercial banks and two specialised banks mentioned by Moody's would not much be strained much by any downgrade, as the banks mostly relied on local deposits for funds while offshore borrowing played an insignificant role.

"Non-performing loans have not accelerated much while excess liquidity remains high and public debt to gross domestic product is low. It is the strength of the Thai banking system that it does not need any assistance from the authorities," Bandid said.

The rating agency would explain its reason for changing the criteria for reviewing banks in lower-than-AAA rated countries, he said. The formal review would likely take place next week and the central bank was ready to provide information.

The agency is placing greater emphasis on the ability of authorities to provide assistance to a troubled bank, rather than a bank's financial status.

Moody's will review the specific circumstances of Thailand to determine the appropriate systemic support for Thailand's bank ratings and the implications for the 11 banks that have been identified as being potentially affected.

Factors that Moody's will consider in its assessment of systemic support include the size of the banking system in relation to government resources, the level of stress in the banking system, the foreign currency obligations of the banking systems relative to the government's own foreign exchange resources, and changes to the government's political patterns and priorities.

Kasikorn Research Centre said the impact of a Moody's downgrade of the 11 banks' ratings would be limited as the banks have a solid financial position, excess liquid assets and low foreign currency deposits, which amounted to 4.40 per cent of total deposits at the end of last year.

The foreigndenominated deposit figure is based on information from the four largest commercial banks.

However, after a ratings downgrade, foreign banks might grow more cautious in making financial transactions with Thai banks and the pricing of some commercial banks to be sold by the Financial Institutions Development Fund to foreign investors might have to be revised.

KGI Securities (Thailand) said in a note that a downgrade by Moody's would not disrupt the banks' operations much, given their low exposure to foreign deposits at a mere 3 per cent of total interest liability, and their very low reliance on foreign borrowing.

However, a downgrade might add more negative sentiment to banking stocks in the short run.

This rating review by Moody's focuses on systematic risk not individual bank risk, the paper said.

Besides, it resulted from the global economic turmoil and the potential increase in the debt burden on the government that might impair the government's ability to support the banking system.

The brokerage said the banking system's capital adequacy ratio (CAR) at 14.8 per cent as of endMarch remained solid.

"If we assume collateral value of 60 per cent, NPLs would have to increase by almost Bt1 trillion to put the CAR of the banking system below the level required by the BOT, which is unlikely in the current situation," it said.

Asia Plus Securities said a Moody's bank downgrade would have a psychological rather than a fundamental impact as it is could be expected given the current economic climate.

It would not shake the banking system as banks are mainly exposed to local deposits, the research note said.

Mounting NPLs and lacklustre lending are the major concerns for the banking industry now, the securities house added.