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Fitch: Krung Thai Bank rating assigned

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Fitch Ratings (Thailand) has today assigned Krung Thai Bank (KTB) National ratings of Long-term ; AA(tha); with a Stable Outlook, Short-term ;F1+(tha) ; and subordinated debt; AA-(tha); (AA minus(tha)). At the same time, Fitch Ratings Ltd has assigned KTB a foreign currency subordinated debt rating of ;BB+; and affirmed its Long-term foreign currency rating at ;BBB-'s; (BBB minus) Outlook Stable, Short-term foreign currency rating at 'F3', Individual rating at 'D/E' and Support rating at 2;.

The ratings are based on the assumption of a high propensity for government support due to KTB's systemic importance, as well as government ownership. While government ownership and control support the debt ratings, this, on a stand-alone basis, has tended to weaken KTB's financial performance, which is reflected in its still low Individual rating.

KTB's Individual rating reflects some improvement in its financial position following the government purchase of its bad loans in 2000. Nonetheless, the Individual rating remains constrained by the still weak operating environment, challenges in re-establishing a viable business, reforming its organisation and the bank's aggressive loan growth strategy, all of which raise concerns about future asset quality problems and profitability.

Partial privatisation should improve its commercial focus, although the government will remain a significant shareholder. KTB's support of government policies, particularly its lead role in stimulating the Thai economy, may impact the bank's financial performance.

KTB reported a net profit of THB8 billion in 2002 due to lower provisions and a decline in funding costs. Despite loan growth, net interest revenue remained surprisingly flat. This was due partly to the aggressive price competition and falling yields, as well as greater reliance on state enteprise and large corporate borrowers and low yielding restructuring bonds. Net interest margins also fell slightly to 1.9%.

KTB's loan growth is very high, 26% in 2002 and a further 20% targetted in 2003, raising the risk of asset quality deteioration. Results for 1H03 showed a fall in net profit to THB1.6bn due to provisioning of THB3.5bn, which the bank indicated was due mainly to a decline in the value of existing impaired loans, although its underlying performance is improving.

At end-2002, non-performing loans (NPLs) stood at THB112.4bn (equal to about 20% of loans), up from THB70.7bn the prior year, mainly due to the reversal of previously written off principal on "loss" loans under new banking rules. This does not include the THB24bn of bad loans transferred to the Thai Asset Management Corporation, though there is partial recourse to the bank. Loan loss reserves stood at THB63.9bn or about 57% of NPLs, up from THB29.1bn due to the new rules.

At end-2002, KTB's Tier 1 capital amounted to THB57.7bn and Tier 2 THB4.8bn, or Tier 1 of 11.7% and total capital ratio of 12.6%. The ratios fell about 3% from the previous year, due to a share warrant buyback from the Financial Institutions Development Fund (FIDF) as well as the high asset growth. Further high loan growth this year will see capital ratios fall again, although the bank should still be strongly capitalised.

--www.theasianbanker.com (September 15, 2003)--

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