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Thai banks need to replenish capital under Basel III: Fitch

Fitch Ratings expects the issuance of Basel III-compliant Tier 2 instruments by Thai banks to increase, driven by the banks' need to replenish their capital amid improved regulatory clarity and investor acceptance.

At the end of last year, there was Bt270 billion in subordinated debt included as Tier 2 capital at Thai commercial banks, virtually all of which are legacy Basel II instruments. Because of the phasing out of these legacy instruments as well as ongoing redemptions, Fitch estimates that this stock of Tier 2 capital will decline by Bt81 billion this year and by a further Bt53 billion in 2015. This suggests that Thai banks will need to issue significant amounts of Basel III Tier 2 instruments to replenish their capital.

While the Bank of Thailand has implemented the Basel III framework since January last year, issuance of Basel III-compliant instruments was initially limited to relatively small private placements. The proposed issue by Thanachart Bank of a Basel III Tier 2 instrument on June 19 will be the first widely distributed transaction in the domestic market.

TBank's planned issue will incorporate a conversion to common equity at non-viability. That structure would suggest a one-notch differential from its anchor rating, which for TBank is the entity's standalone "A+(tha)" rating.

Anuwat Luengtaweekul, executive vice president and chief financial officer of TBank, earlier told The Nation that the objective of the issue of Bt10-billion debentures was to redeem debentures maturing in August. The bond will be offered to local investors and customers with assets under management at the bank of at least Bt10 million, in conformance with a regulation of the Securities and Exchange Commission to comply with the Third Basel Accord on bank capital adequacy, stress testing and market liquidity risk.

To Fitch, however, comfortable levels of core Tier 1 equity ratios in the Thai system of around 11.63 per cent as of the end of March suggest limited immediate pressure to issue Basel III Tier 1 instruments for most of the banks.

Anchor rating

Fitch's approach to rating Basel III instruments is to notch down from an issuer's anchor rating based on non-performance risk as well as loss severity risk. The Basel III Tier 2 instruments seen in Thailand thus far stipulate that losses would be triggered only at the point of non-viability. As they do not include any going-concern loss absorption, under Fitch's criteria there would be no notching down from the anchor rating for non-performance risk.

The non-viability trigger is the injection of public funds to prevent the bank from failing. After non-viability, the subordination of these instruments means there would be reduced recovery prospects relative to senior debt. To reflect this loss severity risk, Fitch's base case would be to rate the instrument by one notch below the anchor rating, and by two notches if very high losses are highly probable (for example in the case of a mandatory full and permanent write-down).

The privately-placed US$170-million Basel III Tier 2 issue by United Overseas Bank (Thai) on March 25, 2013, included a provision for full and permanent write-down of the instrument at non-viability, which implies an instrument rating two notches below the anchor rating.


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