Thai Banks Resilient but Bad-Debt Overhang Persists, Fitch Warns

 

Lenders have curbed risk appetite and profits are resilient, but Fitch expects the NPL ratio to stay at 3-4% for the next one to two years.

 

Thailand's non-performing loans (NPLs) are likely to stay elevated compared with regional peers, Fitch Ratings has said, even as Thai banks show resilient profits and solid capital buffers in a weak economy.

 

Speaking at Fitch's "Global Risks and Regional Economic and Bank Outlook" briefing on Wednesday (September 30), Parson Singha, head of Thailand Financial Institutions at Fitch Ratings Thailand, said Thai banks have reduced their risk appetite through slower loan growth and changes in their loan mix.

 

Asset-quality risks remain high, he said.

 

"In terms of the regional picture, it's clear that [Thailand is] not able to resolve NPL issues as well as these other countries," he said. "NPLs are likely to remain quite high over the near term."

 

 

Slow clearance of bad debt

Parson said the NPL ratio is expected to stay in a range of 3-4% over the next one to two years, as there are no immediate factors likely to push it lower.

 

Fitch's presentation showed Thai NPLs holding at roughly 3.5% in recent years, while the average for emerging Asia-Pacific banks has fallen below that level since 2023.

 

He identified the slow pace of resolution as a central problem. NPLs rose by 85 billion baht during 2020-2021 but have fallen by only 33 billion baht in the three years since.

 

"Fundamentally, [this is] one of the key reasons why credit quality remains weak," he said.

 

Fitch's presentation also pointed to weaker appetite among private asset management companies. Their net loans have edged down since the end of 2023, and their return on assets has fallen towards zero.

 

 

Even so, Parson ruled out the need for drastic steps such as a national asset management company. He said Thai commercial banks remain profitable, well reserved and structurally healthy, far from the systemic crisis of 1997.

 

Fitch's sector outlook for Thai banks is "deteriorating", unchanged from the end of 2025, although the banks' rating outlooks are stable.

 

Fitch places Thailand's viability-rating headroom at "medium-low", alongside the Philippines.

 

 

Lower risk appetite

Commercial banks' loan growth has been very low since the pandemic compared with Thailand's nominal GDP growth, loan growth at state policy banks and the banks' own history.

 

Long-term growth in bank lending slowed from a compound annual rate of 10% in 2010-15 to 4% in 2015-20 and 1% in 2020-25. The mix is shifting towards lower-risk segments.

 

Corporate lending has picked up recently, while lending to small and medium-sized enterprises (SMEs) and retail borrowers has been contracting.

 

SMEs carry the highest NPL ratio, at about 9% in June 2026, compared with about 3% for retail and about 1% for corporate borrowers.

 

Fitch expects lenders to continue reducing risk appetite in the near term and said Thai NPLs would be difficult to resolve, leaving downside risks.

 

 

Resilient earnings and capital

Profitability has been solid given the weak backdrop, Fitch said. Sector net profit rose from 133 billion baht in 2020 to 247 billion baht in 2025, driven mainly by net interest income.

 

Operating profit relative to risk-weighted assets is around 2%, which Fitch's chart placed in the 'BBB' category of its benchmarks, although the 2026 forecast is modest by regional standards. Prospects depend on local interest rate trends.

 

 

The net interest margin has eased as the Bank of Thailand's policy rate has come down. Capital is a source of protection. The sector's common equity Tier 1 ratio rose from 13.9% in December 2015 to 17.6% in December 2025. Loan loss allowances also cover impaired loans by a comfortable margin.

 

Fitch's stress test assumed an oil price of US$100 a barrel in 2026 against a base case of US$70. Under that scenario, Thailand's NPL ratio and credit costs move only modestly, and its capital ratio barely changes.

 

Fitch does not expect core capital to keep rising, however. Banks are trying to improve capital efficiency in a low-growth environment. Parson said lenders are choosing to raise dividends and return cash to investors rather than take on more risk.

 

 

Bond market growth

Prasarn Trairatvorakul, chairman of the Thai Bond Market Association (ThaiBMA) and a former governor of the Bank of Thailand, said the bond market is now a much larger part of the economy.

 

It has grown from 500 billion baht, or 12% of GDP, at the time of the 1997 Asian financial crisis to more than 18 trillion baht, or 96% of GDP, today.

 

The market has also diversified. Thailand's ESG and sustainability-linked bond market has reached 1 trillion baht, he said, adding that regulators and rating agencies must guard strictly against "greenwashing".

 

Dr Prasarn acknowledged that persistently high interest rates have created friction.

 

"We have seen increased stress in certain pockets of the market, particularly in the high-yield and real estate sectors," he said. "The flight to quality is becoming more pronounced. Rigorous credit analysis is essential to rebuilding and sustaining trust."

 

On the wider economy, he said headline growth of slightly over 2% masks a "K-shaped" recovery, in which larger companies fare well while smaller businesses and households struggle.

 

Short-term relief measures such as co-payment schemes provide only temporary relief, he said, and cannot be expected to solve structural problems.

 

Policy should first preserve stability and confidence, he said, and then turn to structural reform.

 

 

Investment themes: rates, AI debt and climate

Win Phromphaet, executive chairman of Kasikorn Asset Management, outlined three global headwinds for investors. The first is "higher-for-longer" interest rates, linked to US federal debt of US$43 trillion.

 

The second is heavy corporate debt issuance to finance artificial intelligence infrastructure. The third is climate risk.

 

For Thailand, he identified extreme heat and water stress as the two main physical risks, with potential implications for industrial assets and for foreign direct investment in data centres.

 

"Economic losses to Thai companies could reach as much as US$11 billion by 2050," he said.

 

As an investment theme, he pointed to transition finance, which KBank has dubbed the "ice cream strategy".

 

It involves financing high-emitting companies that have concrete, verifiable decarbonisation plans, rather than divesting from them wholesale.

 

"You cannot just invest in low-carbon companies," Win said. "Our job is to help cool down high emitters that have solid transition plans in place."