A merger of Thanachart Bank Plc (TBank) and TMB Bank Plc could result in a positive rating action if the merged entity is able to sustain improvements to its domestic franchise and financial strength, according to Fitch Ratings.
Downside risks are most likely to arise from the complexities and challenges of integrating the banks' respective operations and cultures.
The two mid-sized banks announced that they had signed a non-binding memorandum of understanding for a merger on Feb 27. The transaction is still in its early stages, with only limited information disclosed.
Fitch expects to take rating action if the merger plans are executed and when changes in the credit profiles of the two banks become clearer.
According to the plan, TBank would transfer its assets and liabilities to TMB at an estimated value of 130 billion-140 billion baht. Some 70% of the value would be financed by equity via TMB's new share issuance, which would be allocated to existing shareholders of TBank and TMB.
TBank is the sixth-largest commercial bank by assets in Thailand and the country's largest automobile hire-purchase lender.
TMB is Thailand's seventh-largest commercial bank, with a strong focus in transactional banking.
After the merger, the combined bank should have a combined market share of 10-11% for total assets and total deposits, approaching the size of Thailand's fifth-largest bank, Bank of Ayudhya (Krungsri).
According to Fitch, the merger should lead to a more diversified loan portfolio because of the two banks' different market strengths.
Another consideration for the merger discussions is the Finance Ministry's tax incentives announced last year aimed at boosting the size of domestic banks.
The ministry is a 26% shareholder in TMB and is likely to retain a significant stake in the merged entity.
The merger, if it proceeds, is not expected to conclude until towards the end of this year. The transaction is subject to further discussion and negotiation, including the ultimate shareholder structure of the merged entity, as well as several legal conditions, due diligence and approval from regulators and shareholders.