MLR reductions to lower banks’ net interest margins: Moody’s
THAI BANKS’ cuts in minimum lending rates (MLRs) will reduce their profitability, according to a credit outlook report issued by Moody’s Investors Service yesterday.
Last Tuesday, three of Thailand’s largest banks – Bangkok Bank (BBL), Kasikornbank and Krungthai Bank – announced a 25-basis-point cut in their MLRs. These followed similar rate cuts announced by Siam Commercial Bank and TMB Bank a day earlier.
The banks’ cut in their lending rates is credit-negative because it will reduce net interest margins (NIMs) given that their funding costs are likely to remain unchanged over the next two to three quarters.
In particular, Moody’s expects 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.
These coordinated rate cuts are surprising because the central bank has not reduced the policy interest rate since May last year.
Moody’s expects some smaller banks to follow suit and cut their minimum lending rates. The rate cuts are aimed at boosting credit growth in the system.
The rating agency does not expect the lending-rate cut to improve credit demand materially in the system.
It said it expected growth in gross domestic product to remain subdued given that an uncertain political environment and high household leverage have negatively affected domestic demand and consumer sentiment.
Moody’s expects real GDP growth of about 2.5 per cent in 2016, down from 2.8 per cent in 2015, reflecting a continued slowdown since 2014, when anti-government protests during the first half of that year were followed by a military coup in May.
Banking-sector credit growth has also slowed to about 4.3 per cent in 2015 from a historical average of about 11 per cent from 2010-14.
Given that most loans in Thailand are floating-rate, Moody’s expects that the rate cuts, which will immediately affect outstanding loans, will alleviate some of the debt-servicing burden for borrowers, particularly those in the highly leveraged SME (small and medium-sized enterprise) and retail segments.
SMEs’ non-performing-loan 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.
