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Coronavirus outbreak poses stiff test for Thai banks: S&P

Feb 06. 2020
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The outbreak of a new coronavirus will test the resilience of Thai banks, according to an S&P Global Ratings release on Wednesday (February 5).

S&P Global Ratings believes loan growth and asset quality in the sector may weaken as economic activity further slows. While it’s too early to quantify the impact, the short-term impact should be absorbable since the sector has healthy profit levels, strong capital and good coverage ratios, it said.

“We believe the outbreak will have a greater impact on Thai banks than on any other banking system in the Association of Southeast Asian Nations, given the country’s high credit risk and high linkages with China for tourism and trade,” said S&P Global Ratings credit analyst Deepali Seth-Chhabria.

The Thai economy has rebounded strongly after previous crises, such as the global financial crisis in 2008 and severe flooding in 2011, and this limited the impact on Thai banks. However, this time around, the outbreak would exacerbate an economic slowdown already underway due to weak external demand.

“A prolonged delay in Thailand’s economic revival would deepen the downside scenario for domestic banks, given high household leverage, aggressive underwriting standards, and weakness in the small and midsize enterprise [SME] sector," said Seth.

The drag on the hospitality and tourism sectors could be acute since the contribution of tourism exports to gross domestic product is high at about 11 per cent and China accounted for about 28 per cent of total visitors to Thailand in 2018. As multinational firms close their plants and offices in China, the impact will be felt by supply chains worldwide in the fields of high-tech, electronics, and auto and auto parts. China is a sizeable trading partner for Thailand, contributing about 20 per cent of its imports and 12 per cent of exports in the first 10 months of 2019.

Trade, which forms about 12.4 per cent of the loan book, may also be strained, as SMEs account for 74 per cent of this exposure, and will be more vulnerable in a weak economic environment, S&P said. As of September 30, 2019, restaurants, hotels, and transportation accounted for 4.4 per cent of the loan book in the Thai banking sector, and SME exposure is half of this.

Thailand’s household leverage, at 79 per cent, is one of the highest among emerging markets. If the economic weakness is accompanied by job losses in the tourism and general commercial sectors, it could lead to higher delinquencies with a severe impact on asset quality, S&P said.

At that time, steps taken by the government to correct the situation will be key. As seen in the past, the government may unveil supportive policies, including short-term economic stimulus packages targeting SMEs and the retail sector. These measures could provide some cushion for the economy and the banking sector. Earlier on Wednesday, the Bank of Thailand slashed its policy rate by 25 basis points to a record low of 1 per cent in an effort to shore up the economy.

Asset quality started to stabilise in 2019 after a few years of deterioration. Banks have been strengthening their balance sheets and maintaining healthy Tier-1 capital adequacy ratios of about 15 per cent. The overall creditworthiness of Thai banks will continue to benefit from government support, complementing their financial strength, S&P said.

Some bank ratings have limited buffers. If the outbreak is prolonged, these ratings could come under pressure should credit costs rise sharply, loan quality deteriorate severely, or capitalisation weaken significantly.

While the situation is obviously a fluid one, S&P's base-case projection is that the coronavirus crisis will stabilise globally in April 2020, with virtually no new transmissions in May. Its worst-case projection is that the virus stops spreading in late May, and optimistically in March. However, in a black-swan event that authorities fail to contain the viral outbreak, the impact of a prolonged and acute epidemic could be more challenging, S&P said.

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