More challenges expected for Thai banking sector despite strong fundamentals

The banking sector’s liquidity coverage ratio (LCR) as of April was more than Bt3.7 trillion [this is an amount (of what?), not a ratio], representing 167.8 per cent [of what?], indicates the strong capability of banks to deal with market volatility, including the impact from last week’s “Brexit” vote in the United Kingdom, according to Kasikorn Research Centre.
Other healthy fundamentals include the ratio of loans to deposits, which as of April was 99.5 per cent, compared with 120 per cent before 1997 and an average of 112.5 per cent between 1997 and 2000.
The capital adequacy ratio of the industry is 17.78 per cent, compared with 9.1 per cent before the Asian financial crisis in 1997 and 11.3 per cent during the post-crisis period of 1997-2000.
The banking industry’s NPL rate as of April was 2.8 per cent, compared with 52 per cent in the immediate post-crisis period.
The banking sector has reduced its dependence on interest income. Before 1997, non-interest income accounted for only 10 per cent of the total, but as of the first quarter of this year, its proportion had risen to 30 per cent.
Despite the strong fundamentals, Thailand is facing the possibility of economic stagnation, as the prolonged economic slowdown has slowed the rate of loan growth in the banking sector.
The sector also has to more cautious against incurring bad debt during the economic slowdown, said Amonthep Chawla, head of the research unit at CIMB Thai Bank.
He said the banking industry was worried that it would be affected in coming years by the difficult situations now being faced by small and medium-sized enterprises and the banks’ low-income retail customers, with NPLs likely to increase.
Low interest rates are another challenge to the banking industry, he said. The low rates have proved unable to spur loan growth, so Thailand is facing a liquidity trap.
The Bank of Thailand is monitoring the search for yield by investors amid the low-interest-rate environment. One place they are turning for higher yield is real estate, which could be creating a small bubble in the property sector.
The Asian financial crisis in 1997 was partially triggered by a real-estate bubble in Thailand before spreading to other Asian economies, Amonthep pointed out.
Given these factors, the BOT may consider focusing on currency exchange instead of interest policy to tackle capital fund flows in order to depreciate the baht, as a weak baht would support the export sector.
If the export sector is able to recover, supply chains will benefit, easing the banking sector’s worries over the cash flows of the private sector.
Thanyalak Vacharachaisurapol, head of money and banking at Kasikorn Research Centre, said the banking sector’s challenges for the next few years would be how to manage demographic changes and the competition in new financial-service landscape.
Thailand is becoming an ageing society, while people born in the new millennium are on the verge of becoming a major consumer group. The banking sector must therefore design financial products to deal with both of those segments as they become more important.
Services provided by financial technology are forcing the banks to prepare their resources to defend their customer bases and their revenue sources, she said.