Banks' SME 'loan exposure main risk to asset quality'
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FITCH RATINGS believes that Thai banks' exposure to the SME segment is increasingly becoming the main source of downside risk to asset quality, and is likely to contribute to higher non-performing loans (NPLs) over the next 12 to 18 months.
Nevertheless, larger and more diversified banks should be relatively well-positioned to cope with these risks without significant ratings pressure, it said.
Small and medium-sized enterprises account for the largest segment of Thai bank lending, at about 39 per cent of total loans as of end-June 2015, compared with exposure of 30 per cent to large corporates and 31 per cent to consumers.
SME loan growth in recent years was strong, particularly during 2011-2013, with average annual growth of about 14 per cent. This was driven by expanded lending to smaller SMEs with relatively weaker credit profiles, due to intensifying competition and the prospect for wider margins, said the ratings firm.
Nevertheless, SME loan growth slowed markedly to 3.4 per cent last year, and stood at 3.7 per cent in the first half of this year as the banks became more cautious, in line with the weak economy.
The operating environment still appears unfavourable, with relatively low economic growth, volatile financial markets and muted business sentiment, said Fitch.
Furthermore, high leverage in the economy – with private-sector leverage at 150 per cent of gross domestic product as of the end of March – means that debt-repayment ability can quickly deteriorate if conditions worsen further.
Asset quality for SMEs has remained mostly intact. There was only a moderate increase in the NPL ratio for SME loans during the first half, to 3.4 per cent from 3.1 per cent at end-2014, while special-mention loans – delinquent loans not yet classified as NPLs – were flat at 2.4 per cent.
Fitch believes that asset-quality risks may be masked in the short term by debt restructuring and the authorities’ initiatives to support the SME segment, such as low-interest policy loans and the credit guarantee scheme.
However, asset quality could deteriorate more sharply if economic conditions weaken and as supportive measures begin to lapse, it warned.
The size and diversity of the segment means that SME clients’ credit profiles vary significantly for each bank and across the sector.
Fitch expects larger banks with well-established franchises to be in a better position to compete for stronger and larger SME clients, and therefore to be less exposed to asset-quality risks.
These larger banks also tend to have more diversified revenues and loan books, and a stronger loss-absorption capacity in general.
The Thai banking sector as a whole has reasonable buffers, in term of reserves and capitalisation, which should enable it to cope with a normal cyclical economic downturn, said the company.
The average loan-loss reserve coverage ratio for the sector remained strong at about 136 per cent at end-June, while the average Tier-1 capital ratio was at 14 per cent.
In addition, SMEs loans are generally well-collateralised, and some smaller banks also use partial guarantees from the state-owned Thai Credit Guarantee Corporation to mitigate the risks, said the ratings agency.
