Despite expected drop in margin, Fitch optimistic on Thai banks

The credit ratings agency’s associate director of financial institutions, Jindarat Sirisithichote, told the audience that Thai banks were showing strong recovery due to lower credit costs and increased margins.

Jindarat said last year’s operating profit to risk-weighted assets ratio rose to 1.9% compared with 1.6% during the Covid-19 pandemic in 2019, thanks to improved business activity, higher interest rates and reduced credit cost requirements.

“Even though banks’ net interest margin is likely to drop with the interest rate cycle at its peak of 2.5%, the banks should still be benefiting from past rate rises this year,” she said.

She expects the upside momentum to continue this year, which should help banks build core capital buffers and alleviate pressures from asset quality risks.

Jindarat warned, however, that the upside of Thai banks’ outlook may be constrained by the sluggish economic rebound and high levels of debt.

“High levels of corporate and household debt will prompt regulatory actions and regulatory concerns, which may negatively affect banks' performance,” she said. Banks’ cautious lending practices would limit opportunities for aggressive loan growth, she added.

The entry in the finance market of virtual banks may slightly affect incumbent banks’ margins and profitability due to greater competition, especially in retail banking, she said.

Although virtual banks were expected to target mainly underserved and unserved sectors, which may reduce their direct competition with traditional banking institutions, she added.

Application forms for getting a licence to operate virtual banks are now available with the Bank of Thailand until September this year. The central bank has a nine-month window to review the applications, until June 2025.

Licenced virtual banks are expected to commence operations in the middle of June 2026. Three major corporate giants in Thailand have already announced their intention to establish virtual banks so far – Gulf Energy Development Plc, SCBX, and Charoen Pokphand Group.

Need for holistic transformation

Thai and Asian banks need holistic transformation in terms of inclusive impact and business reinvention to boost operational performance and cope with challenges in the financial sector, said Vorapak Tanyawong, vice chairman of Finansia X Plc and senior adviser of McKinsey.

Vorapak said there were several critical areas where transformative banks were excelling, including performance, customer service, organisation culture, risk management, customer-centric operating model, business strategic moves, data and analytics and technology integration.

He expects technologies like artificial intelligence and robotic process automation to take pivotal roles in banks, thanks to their potential for data analysis and risk management, as well as boosting customer experience.

Partnerships among banks and non-banks would become a trend to obtain knowhow from mass customers, he added.

“The banking sector is at a critical juncture where adaptation and innovation are not just beneficial but necessary for survival,” he said.

Vorapak advised bank operators to take a leading role in driving holistic transformation, as well as boosting awareness among employees and stakeholders on the benefits, as well as the risks of avoidance.

“Only one-third of Asian banks achieved success in transformation, and those that failed lack leadership,” he said. “If leaders pay attention to transformation, they can convince the team to change without force.”