Thailand's recent amendments to the eligibility criteria for regulatory capital will enable domestic banks to distribute dividends or pay interest without approval from the central bank, says S&P Global Ratings.
The amendments allow domestic banks to meet minimum capital adequacy requirements, said S&P.
The Bank of Thailand's amendments align the terms for additional Tier-1 (AT1) securities closer to regional norms, said the international credit rating agency.
"We have removed the need for a one-notch downward adjustment on such securities issued by Thai banks that reflected this non-payment issue," said S&P Global Ratings.
Thai banks were previously subject to a profit test, which could result in cancellation of an interest payment if the amount exceeded net profit for the fiscal year.
If the lender failed the profit test, the central bank had sole discretion to approve interest payment on such securities.
This approval would only be granted if the central bank was satisfied with the stability of the bank.
The profit test could lower the rating on an AT1 instrument by one notch because it increased the risk of non-payment to instrument holders, which was unique to Thailand, according to S&P.
S&P typically rates AT1 securities of investment-grade banks four notches below the standalone credit profile of the issuer, reflecting the following factors.
One notch reflects the securities' risk of subordination.
One notch reflects the securities' nonviability clause that requires the bank to permanently write down the securities, partly or fully, if a loss-absorption event occurs.
Two notches reflect the bank's full discretion to cancel any periodic dividend payments.
The Bank of Thailand said in its statement it made the amendments to ease investors' concerns regarding payment of interest and expects the move to facilitate capital raising.
"The Thai banking system's capital adequacy ratio [CAR] of 19.4% as of September 2020 was comfortably above the regulatory minimum, but we believe the regulator is encouraging the banks to build financial buffers to withstand the economic fallout from Covid-19," said the Bank of Thailand.