Thai banking outlook stable but 'risks to asset quality remain'

The government’s approval of an infrastructure mega-projects could help the sector by fuelling loan growth. However, the sluggish economy combined with high household debts could hurt the asset quality of Thai banks in the near future.

S&P credit analyst Deepali Seth-Chhabria said during a teleconference yesterday on “Asean Financial Integration: The Long Road to Bank Consolidation” that despite the expected weakening in asset quality due to higher economic risk and high household debt, the agency had already factored this into last year’s rating actions on Thai banks, and the rating would remain “stable” for now.

On non-performing loans, Seth-Chhabria said S&P did not expect the banking system’s NPLs to increase dramatically in the next 12 to 24 months, “as the increase will only be gradual, and this is because we believe that the economy will start improving again as political stability returns. Besides, Thai banks have recently tightened their underwriting standards in the consumer segment, which should further limit the rise in NPLs”. 

She added: “Moreover, high household debt is especially pronounced among low-income borrowers, and the recent wage increase should somewhat improve these borrowers’ repayment capability.” 

She said most Thai banks had beefed up their loan-loss reserves in the past two years to buffer against rising credit costs, and this should prevent significant deterioration in their financial performance.

In addition, the current trend of Asean banks is to expand their networks regionally, especially in the Greater Mekong Subregion, with the aim of tapping the expanded market after the Asean Economic Community is implemented next year. S&P believes that large banks in Thailand are well placed to benefit from greater regional integration, she said.

However, Seth-Chhabria noted that Thai banks’ regional expansion was lagging behind those of Malaysia and Singapore. Only one Thai bank, Bangkok Bank, has expanded its footprint overseas. Still, S&P believes that more Thai banks will extend their reach outside the country soon, since Thailand has a geographical advantage and the ability to do so. 

Meanwhile, financial integration within Asean is progressing, but the process won’t be without rough spots, said another S&P credit analyst, Chris Lee. 

“We don’t expect the integration to be entirely smooth because, as countries liberalise their banking industries, competition will intensify, and this is not a trend that all local players welcome,” he said.

He said integration would increase the risk of contagion and spillover effects within the region, while the varying pace of liberalisation and divergent regulatory frameworks among Asean countries has complicated the industry’s consolidation and could complicate cross-border mergers.

Acquisition costs are another significant obstacle in many deals, he added.

S&P expects Asean banks to grow their loan portfolios prudently in the next few quarters, considering the higher capital requirements under Basel III and generally improving discipline in loan underwriting.

“We believe asset quality will remain a major risk factor in Asean banks’ credit profiles,” Lee said. “Tighter monetary policy in the US and a subsequent increase of interest rates could trigger similar hikes in Asean markets. Households and companies with heavier debt-servicing burdens will be more vulnerable to such shocks.”