It will be particularly demanding for vulnerable bank clients, especially small businesses.
Still, the risk of a severely stressed macroeconomic scenario has eased and business activity this year should show some rebound from the low base of 2020.
Thailand’s economy has been hit hard, with GDP contracting by 6.1 per cent last year. Fitch predicts moderate recovery of 3.7 and 3.6 per cent in 2021 and 2022 respectively.
However, there are downside risks to the 2021 forecast, as the pace of recovery will be weaker compared to other emerging markets in the region and will limit near-term growth in banks’ financial performance.
Fitch lowered the operating environment mid-point for Thai banks in April last year from “BBB+” to “BBB” with a stable outlook due to significant and sustained risks the pandemic posed to the banking sector.
The pandemic’s impact on banks’ asset quality has been tempered by relief measures such as debt moratoria and restructuring, as well as lenience on loan classifications.
The amount of loans under relief has fallen substantially from its peak in July 2020 and should decline further in the coming quarters, as measures are much more targeted than earlier.
Fitch estimates that loans under relief at commercial banks and non-banking financial institutions, but not including state policy banks, was around 17% at end-2020.
Asset-quality risks are also mitigated by loss buffers. The Thai banking sector’s loan impairment charges rose by more than 40 per cent in 2020, and loan loss allowance coverage was 142 per cent of impaired loans at year-end.
Management overlays for provisioning will likely be used in 2021 as loan impairments rise.
However, there is scope for credit costs to stabilise or fall slightly, as long as there are no further major disruptions to business activity.
Fitch downgraded the Viability Ratings of several major Thai banks last year to reflect anticipated pressures on asset quality and earnings over the next few years.