TEXT-Fitch rates Islamic Bank of Thailand 'BBB-'/'AA(tha)'; outlook stable

Thu Oct 18, 2012 2:56am EDT

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IBANK's ratings reflect Fitch's view of a high probability of support from the Thai government, if needed. This is based on the state's high effective ownership (93.7%) and close control, the bank's legal status as a specialised financial institution (SFI), strong linkages to the state due to its important public policy role, as well as historical financial support from the state. IBANK has a unique public policy role of providing Islamic financial services to Thais and domestic businesses and to support government policies, particularly policies related to Muslim communities in southern provinces.

IBANK is rated below the other three Fitch-rated SFIs (Government Housing Bank ('AAA(tha)'/Stable), Export-Import Bank of Thailand ('BBB'/'AAA(tha)'/Stable), and SME Development Bank of Thailand ('AA+(tha)'/Stable)) due to the bank's lower direct government ownership and less explicit government commitment for support stated in its establishment act compared with those of its peers.

A change in Fitch's view of the willingness or ability of the Thai government to support IBANK, including a material reduction in ownership, could lead to a change in the bank's ratings. However, Fitch believes this is unlikely in the near term given the Stable Outlook on Thailand's IDRs and that IBANK's policy role remains relevant to the state.

IBANK is supervised by the Ministry of Finance (MoF), which appoints the bank's Board of Directors. The bank's operations are inspected by the Bank of Thailand (BoT) while its financial statements are audited by the Office of Auditor General. Over the past five years, the bank has received financial support from the MoF via capital injections in 2007 and 2010 and expects to receive another injection by early 2013. Financial support generally requires cabinet approval, but the state can tap other funding alternatives (such as borrowing from other strong SFIs) that could ensure timely support, if needed.

The bank's performance weakened in 2011 as net profit fell 55% year-on-year to THB0.5bn. This was mainly due to a sharp increase in provisioning costs after the bank tightened its policy for recognizing non-performing finances (NPFs), as recommended by the BoT, and adopted new accounting standard. Higher provisioning costs continued to weigh on performance as IBANK reported a net loss of THB3.1bn in Q112 (based on unaudited financial accounts). Asset quality also weakened with a higher NPF ratio of 9.2%, compared with 8.4% at end-2011.

Fitch believes that IBANK's asset quality is likely to deteriorate further given its high level of special mention finances (about 9.7% of total finances at end-2011), aggressive expansion and weak underwriting standard. It also has a weak deposit franchise and highly concentrated funding. The bank's recent weak financial performance and poor asset quality trend are likely to weigh heavily on profitability and capital.

Nevertheless, state support should help mitigate IBANK's funding and liquidity risks. IBANK's total capital ratio (under Basel I) stood at 10.2% at end-Q112, although it could decline sharply if performance continues to weaken. IBANK is expected to receive THB0.8bn capital injection by early 2013 to support its capital position. The bank plans a further capital increase in 2013, which is subject to the MoF's approval.

IBANK was established under Islamic Bank Act of Thailand Act in 2002. The MoF holds 48.5% stake in IBANK, while the other two state banks, Government Saving Bank (Support Rating: '2') and Krung Thai Bank Public Company Limited ('BBB'/'AA+(tha)'/Stable), hold 39.8% and 9.8%, respectively. Under the act, MoF's direct stake is capped at 49%.

IBANK's ratings have been published as follows:

- Long-Term IDR at 'BBB-'; Stable Outlook

- Short-Term IDR at 'F3'

- Support Rating at '2'

- Support Rating Floor at 'BBB-'

- National Long-Term Rating at 'AA(tha)'; Stable Outlook

- National Short-Term Rating at 'F1+(tha)'

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