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Fitch Upgrades 3 Thai Banks' IDRs on Sovereign Action; Affirms KTB Ratings Endorsement Policy.

Fitch Ratings has upgraded three Thai banks, Export-Import Bank of Thailand's (EXIM), Standard Chartered Bank (Thai) Public Company Limited's (SCBT) and United Overseas Bank (Thai) Public Company Limited's (UOBT)) Long- term Foreign Currency IDRs (LTFC IDRs). At the same time, Fitch has also affirmed Krung Thai Bank Public Company Limited's (KTB) IDR. A full list of rating actions is included at the end of this commentary.

Rating Action Rationale

The rating actions follow the upgrade of Thailand's LTFC IDR to 'BBB+' from 'BBB', Short-Term FC IDR to 'F2' from 'F3' and Country Ceiling to 'A-' from 'BBB+'on 8 March 2013.

EXIM's FC IDRs and Support Rating Floor are equalised with those of Thailand's ratings, which reflect Fitch's view of a high probability of support from the state, if needed.

This is based on the Ministry of Finance's full ownership and supervision, the bank's entitlement to loss compensation and certain debt guarantee provision from the state, its legal status as a specialised financial institution (SFI) and its important policy role as Thailand's principal export credit agency.

The upgrades of SCBT's and UOBT's LTFC IDRs to 'A-' from 'BBB+' follow the upgrade of Thailand's Country Ceiling, as these two foreign-owned banks' LTFC IDRs are capped at the Country Ceiling.

The banks' foreign parents are rated higher than the Country Ceiling. SCBT and UOBT are considered by Fitch to be strategically important subsidiaries to their respective parents, and thus would be expected to receive timely support from their parents, if required.

The affirmation of KTB's ratings reflects Fitch's view that KTB is considered less of a policy institution than EXIM as it is primarily a commercial financial institution.

As such, the bank's ratings have started to de-couple from those of the sovereign as the latter moves up the credit scale. This is observed in many higher-rated jurisdictions, where the tendency of systemically important financial institutions (including those with partial policy functions and which are less than 100%-state- owned) to support government policies is usually lower.

However, its IDRs still remain support-driven based on the government's majority ownership and close control of, and strong historical support for the bank, as well as the bank's systemic importance to the Thai financial system and economy.

Rating Drivers and Sensitivities - IDR and Support Rating Floor

A change in Thailand's FC IDRs would thus result in the same movement of EXIM's Support Rating Floor and FC IDRs. However, adverse changes to Fitch's view of the willingness or ability of the Thai government to support EXIM, including a material reduction in ownership, could lead to a negative change in the bank's ratings.

Any change in shareholding structure of SCBT's or UOBT's parents, in its propensity to support or in the parents' ratings could impact their ratings. As their LTFC IDRs are capped by the Country Ceiling, a change in Thailand's Country Ceiling could also affect their ratings.

A further change in Thailand's ratings could affect KTB's IDRs and Support Rating Floor since KTB's ratings reflect Fitch's expectation of a high probability of support from the government, if needed.

Fitch: No Rating Impact from Sumitomo Mitsui Trust's Share Buy-back Ratings Endorsement Policy

Fitch Ratings says there is no rating impact on Sumitomo Mitsui Trust Bank, Limited (SMTB, A-/Stable) from Sumitomo Mitsui Trust Holdings, Inc.'s (SMTH) repayment of public funds through a buy-back of its common stocks owned by Resolution and Collection Corporation (100%-owned by Deposit Insurance Corporation of Japan).

From a short-term perspective, the buy-back is credit-negative for the group, through resulting in lower

capital levels. However, Fitch believes SMTH's capital will be rebuilt over the longer term through retained earnings in a low-growth environment.

The agency expects moderate internal capital generation in the medium term, given the group's modest risk appetite and solid asset quality that is consistent with its trust banking business model.

In addition, SMTH maintains some capital flexibility, as it will retain half the shares bought back as treasury stocks.

Public funds were injected into predecessor banks of SMTB through an issue of preferred stocks, which were subsequently converted into common stocks in 2009.

The total buy-back amount (about JPY200bn) is equivalent to 9% of SMTH's Tier 1 capital as of end- December 2012. About half of those common stocks bought back will be written off shortly, and the rest will be retained as treasury stocks.

Fitch estimates the buy-back will shave approximately 1% point off SMTH's capitalisation, resulting in a Fitch core capital (FCC) ratio of about 7% at end-March 2013.

Fitch expects SMTH's Basel III- compliant common equity Tier 1 (CET1) ratio to remain somewhat lower than that of Japanese mega banks, partly due to its conservative risk-weighting under Foundation Internal Ratings-based approach.

Nevertheless, SMTH's CET1 ratio is likely to exceed 7% (minimum requirement of 4.5% and capital buffer of 2.5%) by end-March 2016, compared with a low 6% at end- September 2012, on a fully- implemented basis.

Fitch: MoR Breakup Does Not Impact CREC's Ratings Ratings Endorsement Policy

Fitch Ratings says that the Chinese government's plan to split the Ministry of Railways (MoR) into two entities does not impact the ratings of China Railway Group Limited (CREC, BBB+/ Stable).

This is because Fitch believes that CREC's strategic importance to China - a key driver of its ratings - will not change irrespective of the final details of the MoR restructuring.

On 9 March 2013, the Chinese central government announced that the MoR will be split into two - with the regulatory and administrative functions transferred to the State Railway Administration under Ministry of Transportation and commercial operations to a new state- owned corporation, China Railway Corporation. MoR accounts for the bulk of CREC's revenue, order book and receivables. Details of the restructuring, including timing, have not yet been announced.

Fitch believes that the proposed restructuring will not change the strategic importance of rail transportation in China. Investment in this sector will likely remain at levels as previously announced.

While it is uncertain which entity will take over MoR's varying legal and financial obligations, Fitch believes that CREC, along with China Railway Construction Corporation, will remain key railway construction companies in China.

These factors, along with CREC's role in China's foreign policy of constructing infrastructure in developing countries, will remain unchanged, supporting Fitch's top- down approach of rating CREC. CREC is notched three levels below China's sovereign ratings of 'A+', which has a Stable Outlook.

Fitch Rates Star Energy Geothermal's USD Notes 'B+(EXP)' Ratings Endorsement Policy

Fitch Ratings has assigned Indonesia- based Star Energy Geothermal (Wayang Windu) Limited's (SEG) proposed senior secured notes an expected rating of 'B+(EXP)' with a Recovery Rating of 'RR4'.

Key Rating Drivers

The notes are rated at the same level as SEG's Issuer Default Rating (IDR) of 'B+', as they will constitute direct, unconditional and senior secured obligations of the company. The final rating is contingent upon the receipt of final documents conforming to information already received.

Proceeds from the proposed notes will largely be used to refinance SEG's outstanding senior secured USD notes of USD337.5m, of which USD12.5m, USD25m and USD300m are due in 2013, 2014 and 2015 respectively.

As part of the refinancing process SEG will have the option of repaying USD85m of its USD102m subordinated shareholder loan

immediately and a further USD1m per annum thereafter.

Fitch expects the repayment of the shareholders loan to be made out of SEG's existing cash at hand (USD139m at end-December 2012) and as such does not expect SEG's total indebtedness to change materially.

While the refinancing exercise will improve SEG's liquidity in the medium-term, leverage - on a net of cash basis - will increase due to the repayment of USD85m of the subordinated shareholder loan.

This is because Fitch has not treated the loan as debt due to its subordinated nature and it being interest-free. However, Fitch does not expect SEG's funds from operations (FFO)-adjusted net leverage to exceed the negative guidance of 5.0x on a sustained basis.

This is based on Fitch's expectation that SEG will generate positive operational cash flows, incur limited maintenance capex and not pay out any substantial dividends in the medium term.

SEG's ratings reflect geological risks inherent to operating in an active seismic area as well as the high visibility of its earnings.

The rating remains constrained by geological risks, particularly given its single site operation, and by potential heavy capex relative to its balance sheet.

On the other hand, the company has demonstrated reliable operating performance, underpinned by its long-term 'take or pay' energy sales contract with the state power utility, PT Perusahaan Listrik Negara (BBB-/ Stable).

Stress Tests Offer More Room for Regional, Custody Banks The first round of this year's Fed- supervised bank stress tests highlights the relative resilience of U.S. regional and custody banks in a severe economic stress scenario.

The largest trading and universal banks, on the other hand, will likely face constraints in pursuing more aggressive capital distribution plans in part because of severe market shock assumptions employed in the tests, according to Fitch.

The Fed-administered tests, which analyze the ability of 18 large U.S. financial institutions to absorb severe economic and market pressure in a

hypothetical adverse scenario, support the view that most banks' capital and liquidity positions are sufficiently strong to incur heavy losses in their loan and trading books over a prolonged period (nine quarters).

Of the institutions reviewed, only Ally Financial failed to maintain a Tier 1 capital ratio above 5%, after stresses were applied through the end of 2014.

Importantly, the first review assumes that all institutions maintain dividends at existing levels and that no additional capital actions (dividend increases or share repurchases) take place.

Related results from the Comprehensive Capital Adequacy Review (CCAR) tests, which factor in banks' planned capital actions.

Based on the results of the first round of Dodd-Frank tests, we expect all institutions except Ally to meet the Fed's minimum capital requirements for the CCAR. This is supported by the fact that banks are able to resubmit their capital plans after reviewing first-round results.

Large regional and custodial banks saw less significant declines in projected Tier 1 capital ratios by year-end 2014 under the severely adverse scenario. Regional institutions, including BB and T, PNC, US Bancorp and Fifth Third, all maintained capital ratios above 7% at the end of 2014 under the severe stress assumptions.

Custodial banks, including State Street and Bank of New York Mellon, fared best among all institutions in terms of capital levels and projected losses.

The relative strength of these institutions reflects the smaller size of their trading operations and what appears to be relatively harsh market risk scenarios applied to the trading and derivative books of the largest U.S. institutions.

We believe the projected risk-based capital ratios for the largest trading banks were affected significantly by the much higher risk-weighted assets assumed under the Market Risk Capital Rule implemented Jan. 1, 2013.

Therefore regulatory capital ratios under DFAST are not directly comparable to last year's test for the largest institutions -- JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley

-- due to the significantly higher risk weightings.

The big six banks also faced a heavier burden as a result of the time horizon and scope of the global market shock used in the severely adverse case.

The global market stress was applied early in the testing horizon, imposing larger losses on trading banks and magnifying declines in capital relative to the other banks. Trading, private equity and derivative positions of the big six banks were subject to this instantaneous shock.

For the most part, projected trading and counterparty losses for the big six banks under the Fed's test were not significantly different from the banks' own estimates, provided separately.

As an example, Goldman Sachs's estimate of $23.3 billion in losses by the end of 2014 was only modestly lower than the stress test result of $24.9 billion.

Citigroup fared significantly better in this year's stress test relative to 2012. Following the release of test results, the bank has already announced its request to repurchase $1.2 billion in shares, aimed at offsetting dilution. Citi has no plans to increase its dividend payout.

Stresses applied in the tests appeared quite onerous. The severely adverse scenario assumes a sharp economic contraction beginning in 2013, with the U.S. unemployment rate rising by four percentage points to almost 12%.

Residential and commercial real estate prices are assumed to fall by almost 20% by year-end 2014, and equity prices are assumed to fall by 50% from late-2012 levels.

Aviva Results a Stark Contrast to UK Life Insurance Peers

Aviva's announcement this morning of a second major cut in dividend payouts since 2009 - taking the opposite course from its peers - highlights the contrasting fortunes in the UK life insurance sector, Fitch Ratings says.

The dividend cut will help reduce Aviva's debt leverage and strengthen its capital. This is positive for the group's credit profile, which has suffered in recent years from lower capital strength relative to its peer group.

In contrast, the other major life insurers that have reported their 2012 results so far - Old Mutual,

Legal and General and Standard Life - have all raised their dividends after strong results and capital surpluses.

As well as having more resilient balance sheets, we believe other life insurers are more sheltered from peripheral eurozone countries.

Aviva continues to suffer from its exposure to southern European economies, with the value of new business in Italy falling sharply to GBP29m from GBP75m in 2011 and sales of long-term savings products in the country dropping by 30%.

Aviva's GBP3bn loss for 2012 was mainly driven by a GBP3.3bn writedown on the disposal of its US business.

We believe the dividend cut also reduces the likelihood of further cuts after the 2013 interim dividend. This is something that new CEO Mark Wilson will be keen to avoid following a similarly large cut under former CEO Andrew Moss.

The transformation of Aviva under new management is progressing rapidly as it continues to strengthen its balance sheet and narrow its focus on selected core markets.

As a composite insurer with significant non-life operations to complement its life business, Aviva has one important advantage over its major UK-based peers - the diversification benefit that arises from having these two different types of business.

U.S. Banks Face Risks if LBO, M and A Waves Build

Tentative signs of a pickup in large leveraged buyout and M and A transactions, financed in large part by leveraged loans, may boost fee revenues for major U.S. banks in the first quarter, but Fitch sees the potential for any sustained rise in deal activity to increase balance- sheet risk for major U.S. banks in the process.

Although the impact of large-scale leveraged transactions on advisory fee and underwriting revenues will be positive during the first quarter, we recognize that banks may be assuming more risk on their balance sheets -- both as a result of much larger deal size and higher debt-to- EBITDA multiples in some recent leveraged transactions.

The foundation for an eventual increase in LBO and M and A activity has been laid, even in a slow-growth economic environment. U.S. corporate cash positions are very

healthy, and a wave of refinancing activity by firms has increased the amount of cash available for acquisitions.

In addition, private equity firms have ample dry powder (committed but unused capital) to put to work in leveraged deals. Interest rates and credit spreads remain quite low, making deal financing costs very attractive versus historical norms.

In our view, the sheer size of available buyout capital held by private equity firms (estimated at $342 billion by data provider Preqin), points to the potential for a surge in leveraged deal activity over the next few years, assuming global macro conditions improve.

Large U.S. banks, with balance sheets fortified, now have ample lending capacity, and they are likely to look more favorably on participation in deals. In doing so, however, they may retain more risk on their balance sheets and run the risk that any rapid rise in interest rates and credit spreads will limit their ability to sell down risk and syndicate loans.

Large exposure to leveraged credit caused problems for many banks, when liquidity evaporated in the latter part of 2007 and 2008. While current exposures fall far short of precrisis heights, growth in leveraged loan books nonetheless represents a risk that could grow in importance over time.

Recently announced LBOs, such as the Dell and Heinz transactions, are being financed principally with leveraged loans that can be syndicated easily in the currently benign credit environment, reflecting healthy demand for floating rate obligations at a time when many lenders and investors are growing increasingly wary of interest rate risk in a rising rate scenario.

In Europe, Liberty Media's bid for Virgin Media is also being financed through a combination of leveraged loans and high-yield bonds.

Still healthy high-yield bond issuance this quarter, along with the pickup in leveraged loan activity, will likely drive positive investment banking revenue comparisons for all of the large deal-making banks in Q1.

In addition, trading revenues will likely benefit from the favorable fixed-income environment, combined with an upswing in equity trading volumes (barring any macro issues or unforeseen problems in the last month of the quarter).

High Barriers to Entry Stay For New Indian Bank Licences

The issuance of new banking licences in India is likely to be highly selective given the challenges that new entrants face and the cautious approach of the Reserve Bank of India, Fitch Ratings says.

We expect the RBI to exercise stringent measures of selection. Applications are likely to vary considerably in both quantum and type. The risks could be very different this time, with corporate houses expressing interest in a bank licence.

The new entrants have to address financial inclusion, comply with priority-sector lending targets, and position 25% of their branches in rural areas. Such restrictions could limit profitability for new banks, and restrict applicants to those with deep pockets but also to those with a strong commitment and successful track record.

Issuing licenses to conglomerates could increase corporate governance risks, despite RBI's attempt to regulate these issues.

The new guidelines announced on 22 February are tough, requiring a

successful track record of at least 10 years, greater minimum capital, and viable business plans that meet prudential requirements.

The central bank's strong focus on good corporate governance, and its ability to supervise a consolidated banking entity under the recently passed banking reforms, could help in enforcing checks and balances to monitor additional risks.

We believe non-banking finance companies with established franchises (eg asset finance) may be better placed to switch to bank status. This would add diversity and allow greater operational and funding flexibility.

But there are likely to be significant challenges in developing their existing lending franchise, in light of their largely unbanked customer base.

Capital levels in the banks are relatively low despite tight regulation. Greater capital will be required to fund the long-term growth opportunities in India, while the weaker economy makes it harder for the banking sector to attract new capital in the short term.

We believe long-term staying power (patient capital) and a track record in good governance will help to reduce the pressure for new entrants.

The new banks are required to list publicly within three years of operation. This timing may coincide - if new banks commence operations within the next two years - with the bulk of the additional Basel III core capital requirements, which are largely back-loaded for the Indian banking system.

Over three-quarters of the transitional capital needs arise in 2016-2018, and many of the banks will need to access the capital markets for equity to comply with the rules. Capital challenges and stiff competition mean that only the serious new entrants are likely to survive.

We believe that a strong rationale still exists for more banks in India - provided they are well equipped to successfully negotiate the barriers to entry. Banking penetration is high in the urban pockets, but much of the non-urban and rural population remains under-banked.
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Publication:Cambodian Business Review
Geographic Code:9THAI
Date:Apr 30, 2013
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