Thai banks seen as stable over: Moody Said

"The stable outlook is underpinned by our view that reconstruction and inventory-replenishment activities will generate the rebound as firms normalise production and the government implements programmes introduced after last year’s massive floods," said Karolyn Seet, a Moody’s assistant vice president and analyst.

Seet was speaking on the release of Moody’s latest outlook on Thailand’s banking system, which is based on the central scenario that gross domestic product will grow by 5 per cent this year and 5.6 per cent in 2013, up from 0.1 per cent for the whole of 2011.

Moody’s expects annualised loan growth of 5-10 per cent – with the infrastructure and manufacturing sectors accounting for the bulk of the new loans – versus 15 per cent a year ago.

And Thai banks have the financial flexibility to withstand a substantial deterioration in asset quality, according to Moody’s stress tests.

Under Moody’s adverse scenario, in which non-performing loans (NPLs) reach an average of 10 per cent throughout their loan books, the capital levels of all Moody’s-rated banks will remain within a range of 7-16 per cent.

"It would take our highly adverse scenario, with average NPLs of 20 per cent, to cause Tier 1 ratios to erode to levels that would require some banks to raise capital by Basel II standards," Seet said.

The banking system’s overall funding and liquidity profile is also stable, with liquid assets accounting for 30 per cent of total assets, while customer deposits make up 75 per cent of total funding. However, the system’s headline average loan-to-deposit ratio was relatively high, at 122 per cent at the end of last year.

Moody’s does not expect any material change in Thai banks’ dependence on the capital markets.

However, the significant foreign-currency reserves accumulated at the central bank, which serve as a buffer against the risk of an external liquidity crisis, will ensure their continued access to US dollars in extreme conditions, the agency says.

And despite the floods, the profitability of Thai banks will stay strong on the back of solid loan growth.

"We expect net interest margins to be somewhat under pressure owing to the competition for deposits, which may increase interest expenses," Seet said. But Moody’s notes that there is potential for an increase in loan rates in areas where demand is strongest, as well as for higher fee income.

Moody’s rates 10 banks in Thailand, including eight commercial banks and two policy banks. The eight commercial banks accounted for about 89 per cent of the assets of the total banking system as of the end of 2011.