Fitch Ratings (Thailand) has affirmed Industrial and Commercial Bank of China (Thai) Public Company Limited's (ICBCT) National Long-Term Rating at 'AAA(tha)' and National Short-Term Rating at 'F1+(tha)'. The Outlook is Stable.
KEY RATING DRIVERS
Shareholder Support Drives Rating: ICBCT's ratings reflect our view of a 'Very High' probability that the bank would receive extraordinary support from its parent, Industrial and Commercial Bank of China Limited (ICBC; A/Stable/bbb), if needed. The ratings also take into account the relativities of ICBCT's support-driven credit profile within the Thai national ratings universe; we believe ICBCT has the lowest default risk among issuers rated on the Thai national scale, based on the parent's strong ability and propensity to provide support.
Strategically Important to Parent: We believe ICBCT plays a key role in ICBC's regional strategy to support Chinese-related flows. The bank assists the group's customers in business transactions and investments in Thailand. It also facilitates offshore Chinese yuan-related business. There is ongoing collaboration in marketing and financial products, reflecting ICBCT's business synergies with the group.
Clear Reputational Linkages: We believe shareholder support also stems from ICBC's near-full ownership of ICBCT and the substantial level of managerial integration and control between the parent and subsidiary. These linkages, the subsidiary's established presence in Thailand since 2010 and common branding also mean that the group would face severe reputational risk should ICBCT default.
Close Integration with Parent: ICBCT is strongly integrated with the parent and coordinates with ICBC in terms of business strategy, liquidity management and risk controls. The bank's operating processes and IT systems are also closely aligned with those of ICBC.
Capital Support: The bank's capitalisation has historically been indirectly supported by a no-dividend policy and we expect the parent to continue to ensure that ICBCT maintains sufficient headroom over minimum regulatory requirements. ICBCT's common equity Tier 1 (CET1) ratio improved to 14.8% by end-2021 from the start of the Covid-19 pandemic (end-2019: 13.6%) amid profit accumulation and limited loan growth.
Steady Performance: Performance has been stable over the past three years, with an operating profit/risk-weighted assets ratio of around 1.2%-1.3%, despite the challenges posed by the pandemic. Earnings have been buttressed by sound asset quality and hence low impairment charges and we expect further support from a slightly better net interest margin and manageable credit costs. The bank's profitability prospects also reflect ordinary support from the parent - the group's strong network and product know-how should continue to facilitate Chinese yuan-related business growth.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action on ICBCT may be triggered by similar action on ICBC's Long-Term IDR, which would reflect a reduced ability to support the Thai subsidiary. Any assessment would also depend on our view of ICBCT's credit profile relative to other entities rated on the Thai national scale.
Rating downside may also arise from a weakening in ICBC's propensity to support ICBCT. For instance, amid a substantial decline in shareholding - such as to below 75%, along with the presence of a significant minority shareholder - combined with a reduction in the level of management control, integration or financial support. However, we do not expect such significant changes in support propensity to occur in the near to medium term.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
There is no rating upside, as the ratings are at the top end of the scale.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
ICBCT's Basel III Tier 2 subordinated Thai baht-denominated notes are affirmed at two-notches below the support-driven National Long-Term Rating - the anchor rating for the notes. The notching reflects higher loss severity relative to senior unsecured debt, according to Fitch criteria. There is no additional notching for incremental non-performance risks, as the notes do not incorporate going-concern loss absorption, such as coupon omission or deferral features.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The rating on ICBCT's subordinated debt will be downgraded if its National Long-Term Rating, which is the anchor rating, is downgraded.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
There may be upside to the rating on the subordinated notes if we re-assess that loss severity upon non-performance would not be poor and would hence warrant a gap of one notch with the anchor rating, rather than two notches. However, we do not expect any changes in the near term.
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
ICBCT's ratings are linked to ICBC's Long-Term IDR.
Additional information is available on www.fitchratings.com