Fitch warns Thai banks face higher risks despite strong capital buffers
Fitch expects Thai banks’ sector outlook to weaken in 2026 as lower NIM, softer growth and rising debtor pressure weigh on performance
- Fitch Ratings warns of a weaker outlook for Thailand's banking sector, citing risks from declining net interest margins, a slowing economy, and pressure on borrowers' ability to repay debt.
- Asset quality is expected to deteriorate, with the impaired-loan ratio projected to rise, particularly among vulnerable SME and unsecured retail borrowers.
- Despite these risks, Thai banks are well-supported by strong capital buffers, including a record-high common equity Tier 1 ratio.
- Banks also maintain a high capacity to absorb potential losses, evidenced by a strong average loan-loss reserve coverage ratio of 189%.
Fitch Ratings expects Thailand’s banking sector outlook to weaken in 2026, despite solid first-quarter performance among the country’s six domestic systemically important banks, or D-SIBs.
The ratings agency said overall profitability remained sound, but net interest margins (NIM) had declined, while the weaker economic outlook and growing pressure on borrowers’ debt-servicing ability were likely to weigh on banks’ performance and asset quality over the rest of the year.
Based on preliminary results from Thailand’s six major banks, average return on assets stood at around 1.28% in the first quarter of 2026, up slightly from 1.23% in 2025. The impact of lower NIM was partly offset by effective cost control and stronger fee income.
However, Fitch said banks’ earnings still faced risks, as NIM may not yet fully reflect the impact of the Bank of Thailand’s five policy rate cuts between February 2025 and February 2026. Improved fee income could also become volatile if economic conditions weaken, while credit costs are expected to remain relatively high.
Thai banks are entering a more challenging period after strong performance in 2024 and 2025, when key profitability indicators recovered to levels above those seen before the Covid-19 pandemic. Fitch therefore expects earnings to remain acceptable, although they may soften during the rest of 2026.
Asset quality was broadly stable in the first quarter, with the average impaired-loan ratio of the six banks unchanged at 3.7% from the end of 2025. Fitch expects the ratio to rise during the remainder of 2026, though it is likely to stay below 4.0%.
SME borrowers and unsecured retail borrowers are expected to face the greatest pressure. Household debt, still high at around 87% of GDP, is also likely to limit borrowers’ financial flexibility and repayment capacity, especially as living costs rise.
Fitch said severe shocks to the economy or employment could prompt authorities to introduce forbearance measures, which may help slow the rise in impaired loans. However, this is not Fitch’s base-case scenario.
At the same time, Thai banks retain strong capacity to absorb asset-quality deterioration. The average loan-loss reserve coverage ratio of the six major banks rose to 189%, from 185% at the end of 2025, giving them room for future write-offs and helping reduce the risk of a sudden sharp increase in provisioning.
Capital strength is another key advantage. The banking sector’s average common equity Tier 1 ratio rose to a record high of 17.6% in 2025, and Fitch expects capital positions to remain a strong risk buffer. Very low loan growth this year should also support banks’ internal capital generation.
Most Thai banks rated by Fitch continue to carry a stable outlook, even though the agency expects the sector outlook to weaken in 2026. This reflects the remaining headroom in banks’ capital and earnings profiles.
However, some bank ratings may carry a negative outlook because they are linked to Thailand’s sovereign rating or constrained by the country ceiling, in line with Thailand’s own negative rating outlook.
