Brighter outlook for banks’ problem loans

“We believe a recovery in the credit cycle in Thailand could face roadblocks,” said S&P Global Ratings credit analyst Ivan Tan, in a report titled “2018 Could be a Turning Point for Thailand’s Bank Credit Downcycle”. “Non-performing loans (NPLs) have stabilised overall, but the quality of smaller-business and household loans has continued to deteriorate, albeit at a moderating pace."
Thai banks' average NPL ratio hit 2.97 per cent of total loans at the end of the third quarter of 2017, only marginally higher than the 2.83 per cent recorded on December 31, 2016. 
The SME sector’s NPL ratio of 4.63 per cent is notably higher than the industry average, and the gap is wider than the corporate sector's ratio of 1.69 per cent.
The economy is expanding at the fastest rate in four years, leading the central bank to increase its 2017 and 2018 GDP growth forecasts to 
3.9 per cent for both years. However, tourism and exports continue to do the heavy lifting, with a limited knock-on effect to domestic demand. 
As such large companies, particularly export-related ones, have been the main beneficiaries of the country's economic pickup.
SMEs are geared more toward the domestic economy, whose growth is lagging the external sector. Constraints on domestic demand include high household debt, an ageing population, and flat farm income in the recent past. Still, it's possible the benefits of stronger growth and potential large government-led infrastructure could feed into the SMEs over time.
SMEs account for a significant 33 per cent of Thai commercial bank lending, and remain the biggest asset quality problem for banks. The report also notes that while the headline NPL figure has stabilised, “special-mention” and restructured loan rates are on the rise, suggesting lingering weaknesses in this sector.
Large corporates have reaped the early benefits of the recovery. We believe that over 2018, the second-order effect from improved sentiment and business confidence could feed into the retail and SME space. 
“We believe the build-up of special mention loans could moderate in 2018, accompanied by slower NPL formation in the SME segment,” said Tan. “In our view, the turning point in the credit cycle can only happen when there is a sustainable reduction in both special mention and restructured loans.”
S&P Global Ratings estimates that loan growth in Thailand will expand in 2018, but that profitability will be constrained by higher credit costs. This is because banks continue to demonstrate a fairly conservative provisioning treatment, which has helped the sector build up adequate buffers to deal with any further fallout.