Fitch Ratings (Thailand) has placed the ratings of Thanachart Capital and Thanachart Bank on Rating Watch Evolving, following news that Bank of Nova Scotia is buying a stake in the banking subsidiary.

The rating agency says that the rating actions follow Thanachart Capital Group’s announcement of its plan to sell a 24.99% stake in its main banking subsidiary, Thanachart Bank, to Scotiabank, and that it will change the group’s organizational structure by transferring the ownership of eight subsidiaries of Thanachart Capital (including its securities, life and non-life insurance, leasing and fund management subsidiaries) to Thanachart Bank. The majority stake of Thanachart Bank and distressed asset management subsidiaries of the group will continue to be held by Thanachart Capital, which will remain a holding company of the group.

On March 20, Fitch revised the ratings Outlook on Thanachart Capital and Thanachart Bank to Negative from Stable, reflecting the agency’s concerns on deteriorating profitability, weakening capital position as well as vulnerability to rising delinquencies and credit costs stemming from the group’s high growth strategy. Thanachart Capital and Thanachart Bank have been most aggressive in establishing their dominant market positions over the course of six years (average annual growth rate of 30.4%); however profitability appears the weakest among major auto hire purchase operators, due primarily to its aggressive pricing, rising funding costs and costs incurred from its large branch network expansion, Fitch says.

It notes that Scotia will spend 7.1 billion Thai baht through the purchase of 157.1 million existing shares from Thanachart Capital and another 276.3 million new shares, which will be issued on a private placement basis by Thanachart Bank in mid-2007. The acquisition is expected to be completed by the end of June. Scotia expects to cease its Bangkok branch’s operation and sell the assets of this branch to Thanachart Bank to comply with the Bank of Thailand’s “One Presence” policy.

Fitch adds that Scotia has an option to increase its stake in Thanachart Bank to 49% in the future, subject to the BoT’s approval. There will be three representatives from Scotia to sit on Thanachart Bank’s board of directors, which is composed of 10 directors in total.

“The new capital of 4.5 billion [Baht] from Scotia should help strengthen Thanachart Bank’s Tier 1 capital by about 30%. Thanachart Capital also has a plan to raise additional 4 billion [baht] of capital at a later stage,” it says, adding “Future rating actions will be subject to further assessment of the impact on Thanachart Bank’s banking franchise, earnings, overall business strategy and risk management, the extent to which this addresses Fitch’s concerns on the group’s profitability and asset quality. Thanachart Capital and Thanachart Bank could benefit from Scotia’s expertise in global transaction services, commercial and retail banking and wealth management, as well as technology and operations.”

Fitch notes that Scotia is the most internationally diverse of Canada’s banks, with substantial Caribbean and Latin American operations and a significant Asian presence. In 2006, Scotia completed several small acquisitions including two Peruvian banks, Citibank’s consumer lending business in the Dominican Republic, National Bank of Greece (Canada), the mortgage business of Maple Financial (Canada), and Banco Interfin (Costa Rica). More recently, Scotia announced the acquisition of Travelers Leasing (Canadian auto leasing) and Dehring Bunting & Golding (Jamaican securities dealer).