Thai banks' rate cuts to reduce profitability

In effect, it said the rate cuts would hurt banks' interest margins. 

SMEs’ non-performing loans (NPL) ratio increased to 3.7 per cent at the end of 2015 from 3.3 per cent a year earlier, while the retail NPL ratio climbed to 2.6 per cent from 2.4 per cent over the same period.

"We do not expect the lending rate cut to materially improve credit demand in the system. We expect economic growth to remain subdued given that an uncertain political environment and high household leverage have negatively affected domestic demand and consumer sentiment," said Moody's analysts.

The rating agency expects Thailand's gross domestic product (GDP) to grow by 2.5 per cent in 2016, down from 2.8 per cent in 2015, reflecting a continued slowdown in economic growth since 2014, when anti-government protests during the first half of 2014 were followed by a military coup in May 2014. Banking sector credit growth has also slowed to about 4.3 per cent in 2015 from a historical average of about 11 per cent during 2010-14.

Last Tuesday, Bangkok Bank, Kasikornbank and Krung Thai Bank announced a 25-basis-point cut in their minimum lending rate. These follow similar rate cuts announced by Siam Commercial Bank and TMB Bank a day earlier.

Moody's noted that the banks’ cut in their lending rates is credit negative because it will reduce net interest margins (NIMs) given that the banks’ funding costs are likely to remain unchanged over the next two to three quarters. 

"In particular, we expect the negative effect on margins to be more pronounced for banks such as Standard Chartered Bank (Thai), BBL and CIMB Thai Bank because of their lower risk adjusted NIMs," it said.

The rating agency viewed that these coordinated rate cuts are surprising because the central bank has not reduced policy rates since May 2015.