Moody's forecasts improving operating environment

The Thai banking system is stable which reflects a gradually improving operating environment in the country, Moody's says.
The credit rating company says the operating environment will gradually improve, with fiscal spending underpinning economic growth. 
Moody's says in a recently published outlook that it expects Thailand's real GDP growth to slightly accelerate to about 3.4 per cent in 2017 from 3.2 per cent in 2016, helped by the government's infrastructure investment plans. 
“We estimate credit will grow 4-5 per cent system wide in 2017, moderately faster than 3.2 per cent in 2016. On the other hand, weak private sector investment, political uncertainty and a high level of household leverage will continue to constrain growth potential for the broader economy and the banking sector,” the outlook said.
Asset quality will be stable broadly but some weaknesses will persist, the company said. The system's problem-loan ratio is likely to hold steady, given broad economic improvements and relatively slow credit growth. However, stress among small and medium-sized enterprises (SMEs) will remain a key risk to asset quality. A sign of stress among smaller businesses is accelerating growth in restructured loans, most of which are likely for SMEs.
Moody's said that capitalization and coverage of loan-loss reserves will continue to improve. The average common equity Tier 1 (CET1) ratio of rated commercial banks in Thailand rose to 14.5 per cent in 2016 from 13.9 per cent in 2015. Meanwhile, their non-performing loan (NPL) coverage ratio climbed to a healthy 135 per cent at the end of 2016 from 132 per cent a year earlier. These buffers will further strengthen, thanks to banks' ability to generate capital internally and benign credit growth.
Liquidity will remain sufficient, Moody's continued. “We expect Thai banks to maintain their loan-to-deposit ratios (LDR) at 95-98 per cent as they have in the past two years. That is a high level but Thai banks have sufficient liquid assets to cope with any sudden deposit flight,” the outlook continued.
“Profitability will be stable as credit costs hold steady, albeit at a high level. Thai banks' credit costs will not rise much but remain higher than historical averages because of their tendency to proactively provision for problem loans and preparations for the local implementation of IFRS 9 in 2019. As such, returns on assets of rated commercial banks in Thailand will remain at 2016 levels.
“Government support will remain strong with near-tem adoption of a bail-in regime unlikely,” Moody's said in an outlook titled “Banking System Outlook - Thailand: Economic improvements and strong loss buffers support stable outlook”.