Fitch Affirms UOB Thai's Long-Term IDR at 'A-' and National Rating at 'AAA(tha)'; Outlook Stable

UOBT's Basel III Tier 2-compliant Thai baht subordinated notes have been downgraded to 'AA(tha)' from 'AA+(tha)'. The downgrade on the notes reflects Fitch's revised base-line notching for subordinated debt in our updated Bank Rating Criteria.

A full list of rating actions is below.

KEY RATING DRIVERS

IDRS, SUPPORT RATING, NATIONAL RATINGS AND SENIOR DEBT

UOBT's IDRs are driven by institutional support from its Singapore-based parent United Overseas Bank Limited (UOB; AA-/Rating Watch Negative). UOBT plays a key and long-standing role in the parent's strategy in the southeast Asian region. UOB owns nearly 100% of UOBT, and there is significant integration of their management and operations. Furthermore, UOBT has close branding and marketing linkages with the parent.

UOBT's National Rating reflects the bank's relative risk positioning on the Thai national rating scale. The agency believes that UOBT's support-driven profile is in line with the strongest credits in the country, as UOB's rating is multiple notches higher than Thailand's sovereign rating of 'BBB+' and Country Ceiling of 'A-'.

UOBT's senior debt rating is equalised with the bank's National Rating, as the debt constitutes unsecured and unsubordinated obligations of the bank.

VIABILITY RATING

UOBT's Viability Rating (VR) of 'bbb-' reflects its standalone profile, which incorporates the bank's sound capital and liquidity buffers, and adequate company profile. UOBT is a relatively small bank in the Thai market, with a deposit market share of around 3%, which leads to constraints on business model diversity and economies of scale. The VR includes assumptions of ordinary support from UOB, such as in terms of risk management and product expertise.

The VR also takes into account the much more challenging operating environment and large-scale economic disruptions from the coronavirus pandemic. These disruptions will exacerbate Thailand's already weakening business landscape in the past several years on slower domestic and global economic growth. The Bank of Thailand has implemented regulatory relief measures to assist borrowers in debt restructuring, but these measures do not eliminate the economic risks to weaker and more vulnerable debtors. For details on Thailand's operating environment, please see "Coronavirus Increases Challenges for Thai Banks' Operating Environment", published 2 April 2020, at http://www.fitchratings.com/site/pr/10116671.

The duration and trajectory of the pandemic remains uncertain. However, Fitch expects UOBT's financial performance under our base case-scenario to be negatively affected over the next two years at least, with core ratios weakening from those in 2019. UOBT's impaired-loan ratio has consistently been better than sector averages and Fitch expects this would continue given the bank's conservative risk appetite, which is not expected to change. UOBT's profitability will be hampered by rising credit costs, the low interest-rate environment and more moderate non-interest income.

SUBORDINATED DEBT

UOBT's Basel III Tier 2 subordinated Thai baht notes are rated two notches below the bank's National Long-Term Rating. This is in line with Fitch's base-line notching approach in our updated Bank Rating Criteria, and takes into account our expectations of a poorer recovery rate compared with senior unsecured instruments. There is no additional notching for non-performance risks, as the notes do not include going-concern loss-absorption features.

RATING SENSITIVITIES

IDRS, SUPPORT RATING, NATIONAL RATINGS AND SENIOR DEBT

Factors that could, individually or collectively, lead to positive rating action/upgrade:

There is no upside to the Long-Term IDR, which is constrained by Thailand's Country Ceiling, unless the sovereign rating was upgraded. There is no upside to the Support Rating, National Ratings, or senior debt rating, which are at the top end of the respective scales.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A significant decline in the ability of UOB to support UOBT could lead to lower ratings. This could be evident by a multi-notch downgrade of the parent's rating (since there is currently a multiple notch gap between UOBT's IDR and the Thai Country Ceiling), which we don't expect in the medium term.

A sharply lower propensity by UOBT to support UOB may also be negative for the subsidiary's Long-Term IDR, Support Rating, National Long-Term Rating and senior debt rating. For example, this may be indicated by a decline in shareholding to below 75%, combined with reduced management control and operational integration. However, Fitch does not expect this to occur in the medium term.

VIABILITY RATING

Factors that could, individually or collectively, lead to positive rating action/upgrade:

There may be upside to UOBT's Viability Rating if further enhancements in UOBT's franchise relative to domestic peers lead to sustained improvements in profitability, such as in the operating profit/risk-weighted assets ratio, while the bank maintained a conservative, consistent risk appetite and better-than-sector impaired-loan ratio. However, the current challenging operating environment is likely to constrain the probability of upside in the next two years.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The Viability Rating could be downgraded if there is material and sustained deterioration beyond Fitch's expectations in asset quality and earnings core metrics, which may also lead to a reassessment of the adequacy of capital buffers. For example, weakening asset quality may be indicated by an impaired-loan ratio sustained at more than 4% (2.9% at end-2019), while earnings deterioration may be denoted by an operating profit/risk-weighted asset ratio of less than 1% (1.8% at end-2019).

SUBORDINATED DEBT

Factors that could, individually or collectively, lead to positive rating action/upgrade:

There is no upside to UOBT's Basel III Tier 2 subordinated notes. The anchor rating is the bank's National Long-Term Rating, which is at the top end of the scale.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

UOBT's Basel III Tier 2 subordinated Thai baht notes would be affected by a downgrade in the anchor rating, which is the bank's National Long-Term Rating.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

UOBT's IDRs and Support Rating are driven by the ratings of its parent United Overseas Bank Limited of Singapore.

ESG CONSIDERATIONS

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

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