Flood Damage negative to Thai banks' credit: Moody's

While no government data has been published, initial estimates from major Thai commercial banks suggest that up to 1 per cent of their outstanding loans would be directly affected, and another 58 per cent indirectly affected, it said.

In a statement released today, Moody’s noted that banks are especially vulnerable to the small and midsize enterprise segment as the reported closure of a number of large industrial ventures (more than 400 Japanese auto manufacturers and electronics firms in six industrial parks north of Bangkok have been affected) could directly jeopardise many of their suppliers. We also expect bank profits to be affected by higher provisioning as well as repair costs to ATMs and other premises.

In addition, the Bank of Thailand (BOT), has requested that banks assist affected customers through measures such as principal and interest grace and tenor extension, lower installments, reconstruction financing, and waiving selected fees and charges. The central bank also indicated that it will not classify flood-hit accounts as impaired for one year. The credit ratings firm believes, on balance, asset quality will deteriorate in the next six months and that, as a result of policymakers’ signaled forbearance, economic non-performing loans (NPLs) will be higher than reported NPLs.

Despite these credit negative developments, Moody’s expects the floods will not materially undermine banks’ creditworthiness because the effects will be short lived and banks’ asset quality was improving in the run-up to the disaster. Credit growth (the denominator effect) and recoveries on problem loans that have exceeded allocated provisions have driven improvements.

The central bank data up to the end of June indicates that asset quality has improved across the commercial banking industry. NPL ratios steadily fell to 3.3 per cent at the end of June from 5.3 per cent at the end of 2009. Separately, the BOT estimated that Thai banks owned roughly half of the affected industries’ debt, and that foreign financial institutions owned the remainder. As a result, there will be some degree of burden sharing from external creditors that will mitigate the effect on the domestic banking sector.

In addition, the sector’s good capitalisation buffers support the banks’ resilience in this crisis. With an average Tier 1 ratio of 11.3 per cent at the end of June 2011, Moody’s expects most banks to have sufficient capital to absorb losses from the current disaster, and to support a potential reconstruction-driven rebound in economic growth in 2012.