Krungsri aims to boost returns despite inflation

The bank expects 11 per cent ROE this year. "We are on track to get that number," said president and chief executive officer Mark Arnold.

The bank registers about 45 per cent of its loan portfolio in the high-margin retail segment and could see that figure rise to 50 per cent by the end of this year thanks to robust growth of auto and mortgage loans. The remaining 55 per cent are split equally between low-margin corporate lending and high-margin SME (small and medium-sized enterprises) loans.

Krungsri has made major revamps to its products, branch features and technology in the past three or four years, and its challenges now lie in persistently high inflation and rapid rises in interest rates.

"It's not stable. A year and half ago, interest rates were flat and stable, more predictable. The more interest rates rise, the more risk of a drop in demand. That's the biggest risk. It's outside of our control but we have to manage through it. It challenges everybody, not just in banking but in manufacturing and everywhere," Arnold said.

Headline inflation accelerated more than expected to 4.29 per cent in August year on year, up from 4.08 per cent in July, despite a series of interest-rate hikes by the central bank. Since July last year, the Bank of Thailand has raised its benchmark rate by 225 basis points to 3.50 per cent.

If inflation continues to rise, there may be no other choice for the central bank but to hike the policy interest rate. Arnold anticipates that the rate will end the year at 3.75-4 per cent, depending on how many government schemes come down. Next year could see the rate at 4-4.5 per cent.

Amid extreme uncertainty amid the rising-interest trend and wage increases, the bank has done stress tests to assure it can cope with possible crises.

Next year could be very tough for the private sector. "Wages and general inflation go up. The SME sector has a double hit. You get slowdowns in manufacturing. It's a triple hit. How hard I don't know. Every bank has done stress tests on that. It's the right thing to do. Everybody moves up capital reserves and it depends on how hard it gets," Arnold said.

Bank of Ayudhya's capital adequacy ratio is currently 16.85 per cent, up from 15.84 per cent at the end of last year. "We make sure of more capital to cope with Basel III when it comes and anything else we want to do. All Asian banks, especially in Thailand, have average CAR of 15-16 per cent, compared with Europe's 8-9 per cent. That's the place to cope with shocks," Arnold said.

Non-performing loans amounted to Bt35.9 billion at the end of the second quarter of this year, down from Bt38.1 billion at the end of 2010. After its debt sale planned for the end of the year, Krungsri expects its NPL level to continue to come down.

Arnold expressed confidence in the Thai economy, with high business and consumer confidence after the calm results and smooth democratic process of the July 3 general election. "Stability is a key thing for politics. Foreign investors want to see stability. They don't want to see crisis every year."

This year could see gross domestic product expand 3.5-4.5 per cent, subject to the new government policies, and next year may witness a growth range of 2-3 per cent given impacts from the global economy and the government's economic stimulus.

There exist "uncertainties in the US and Europe. Everyone fears a double-dip. Thailand will survive. In terms of manufacturing, if demand slows down in the US and Europe, we will be impacted but less than other Asian countries because of a lot of intra-Asia trade," Arnold said.

Uncertainty could lead to opportunities. "The way we expanded in the last three to four years, that's not the end. We will carry on. It's time we give customers more choices," Arnold said, stressing that one brand - Krungsri - does much more in a number of combined businesses including asset management, leasing and factoring with nearly 600 branches nationwide.