TEXT-S&P summary: United Overseas Bank (Thai) Public Co. Ltd.
(The following statement was released by the rating agency)
Jan 16 -
Summary analysis -- United Overseas Bank (Thai) Public Co. Ltd. --- 16-Jan-2013
CREDIT RATING: BBB+/Stable/A-2 Country: Thailand
Primary SIC: Commercial banks,
Credit Rating History:
Local currency Foreign currency
01-Nov-2006 BBB+/A-2 BBB+/A-2
20-Jul-2005 BBB/A-2 BBB/A-2
Ratings Score Snapshot
Issuer Credit Rating BBB+/Stable/A-2
Business Position Moderate (-1)
Capital and Earnings Strong (+1)
Risk Position Adequate (0)
Funding and Liquidity Below Average
and Adequate (-1)
GRE Support 0
Group Support +3
Sovereign Support 0
Additional Factors 0
The stable outlook on United Overseas Bank (Thai) Public Co. Ltd. (UOB-Thai) reflects the outlook on the sovereign ratings on Thailand. We may lower the ratings on UOB-Thai if the bank's status within the UOB group is diminished or if the sovereign is downgraded. Conversely, we may upgrade UOB-Thai if the sovereign rating is similarly raised.
The ratings on UOB-Thai reflect the bank's status as a "core" subsidiary of United Overseas Bank Ltd. (UOB; AA-/Stable/A-1+; axAAA/axA-1+). The rating on UOB-Thai is equated with the rating on UOB and is three notches higher than UOB-Thai's stand-alone credit profile (SACP) of 'bb+'. The foreign-currency sovereign credit ratings on the Kingdom of Thailand (foreign currency BBB+/Stable/A-2; local currency A-/Stable/A-2; axAA/axA-1) constrains the rating on UOB-Thai. This is because we rarely rate banks above the long-term sovereign credit rating on their home country. We generally consider it unlikely that such institutions would remain immune to changes in the domestic economy.
UOB-Thai benefits from being highly integrated within the UOB group. The bank is almost wholly owned (99.7%) by UOB, the third-largest bank in Singapore by assets. We believe that UOB-Thai is instrumental to the group's presence in Thailand, which is a key market under the group's regional expansion plans. The bank's SACP reflects its "moderate" business position, "strong" capital and earnings, "adequate" risk position, "below average" funding, and "adequate" liquidity, as our criteria define those terms.
UOB-Thai's anchor is 'bbb-'. We use a bank's anchor as our starting point in assigning an issuer credit rating. The anchor is based on our Banking Industry Country Risk Assessment methodology and our view of the economic and industry risks in the countries where the bank operates. Our economic risk assessment of Thailand factors in the country's relatively low income levels, underdeveloped infrastructure, and delayed structural reforms. Recent high economic growth has led to a buildup of economic imbalances within the country. These could increase over the next year if loan growth continues to significantly outpace the rise in nominal GDP or if housing prices rise steeply. Moreover, given the slow pace of improvement in the country's legal framework, we view credit risk as high. A high level of highly stable core customer deposits supports Thailand's industry profile. We note that regulations have improved considerably since the Asian financial crisis highlighted weaknesses. Regulations are now broadly in line with international standards.
UOB-Thai's weaker competitive position and franchise as a small foreign bank in the Thai market underpins our assessment of the bank's business position. UOB-Thai is small compared to other domestic banks, with a 1.9% market share of loans and 1.8% share of deposits as of June 30, 2012. The bank's market share has been declining over the past few years, in part due to its cautious approach toward growth in the Thai market and market dynamics. We expect the bank to leverage on its parent's strength and focus on superior product offerings and customer service to offset some of its size limitations.
We expect UOB-Thai's risk-adjusted capital (RAC) ratio to remain slightly above 10% over the next 18 to 24 months. We believe the RAC ratio will decline gradually due to the bank's weak earnings generation, although its moderate loan growth will partially temper the slide. UOB-Thai's average growth rate over 2007-2011 was a low 4.1%, and its loan book contracted in two of those years. Loan growth has picked up since 2010, although we believe average longer-term growth will remain below the industry's. Our expectation is also based on our view that UOB-Thai will carefully manage its credit costs and maintain a reasonable dividend payout. There are early signs that the bank's revenue enhancing strategies are leading to better profitability. However, it remains to be seen if UOB-Thai can close the gap vis-a-vis industry peers on a sustainable basis.
Our assessment of UOB-Thai's risk position reflects our view of the bank's straightforward core lending and deposit-taking business. The bulk of the bank's income is derived from stable lending and fee income sources. We believe such income sources will prove resilient in the event of a global macroeconomic slowdown. In our view, the bank has been able to manage its asset quality adequately, as demonstrated by its credit costs that are comparable to other rated Thai peers. Moreover, widespread and severe flooding across the country in 2011 led to no material losses.
Our assessment of UOB-Thai's funding profile reflects the bank's smaller branch network and weaker brand recognition in the confidence-sensitive Thai banking system. Notably, customer deposits constitute about 60% of UOB-Thai's liabilities as of June 30, 2012, lower than the industry average of 75%. In a hypothetical stress scenario, we believe the bank's deposit base would be more vulnerable compared with that of its larger domestic peers. We view the bank's liquidity as adequate, underpinned by its sizable holdings of government bonds and central bank balances.
Related Criteria And Research
-- Banking Industry Country Risk Assessment: Thailand, Nov. 16, 2012
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011