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Weaker outlooks for Thai banks and corporates: Fitch

Mar 18. 2020
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Asset quality and earnings of Thai banks will be significantly weaker in 2020 while Thai corporates face challenging credit conditions as the country's economy will be one of the hardest hit by the coronavirus pandemic in the APAC region, Fitch Ratings analysts told Fitch Ratings (Thailand) Limited's webinar today (March 18) .

Thailand's economy has a high reliance on tourism and exports, said Jeremy Zook, Associate Director, Sovereign Ratings at Fitch Ratings.

Fitch has just revised the sovereign rating Outlook to Stable from Positive in view of the rapidly evolving impact of the pandemic on the Thai economy and lingering political uncertainty.

It forecast growth to slow to 1.0 per cent in 2020, mainly due to slowing tourism, but a weaker global economy and the drought.

There are considerable downside risks to this forecast as more stringent quarantine measures are being imposed on travellers and a rising number of domestic Covid-19 cases could dampen consumption.

Despite the challenging near-term growth outlook, in Fitch's view, Thailand's strong external and public finances serve as a cushion against the current economic and financial shock, consistent with the 'BBB+' sovereign rating.

Fitch's Director of Corporate Ratings, Obboon Thirachit, cautioned issuers and investors that credit conditions for Thai corporates will be challenging in 2020 as downside risks increase across portfolios and as some business-specific pressures weigh in.

Even before the coronavirus, Thai corporates had already been affected by slow economic growth and subdued earnings. Further economic downturn stemming from the pandemic could delay earnings recovery, putting additional pressure on the credit profiles of the issuers with high leverage.

Fitch expects further negative rating actions to continue for the rest of 2020 because of the higher proportion of corporates with Negative Outlooks and increasing downside risk, although the majority of Thai corporates should remain on Stable Outlook in light of their resilience and rating headroom.

In 2020, among corporate sectors, the oil and gas and petrochemical sectors are likely to be adversely affected by the combination of demand shock from the coronavirus and the low oil price from oil supply shock.

Still, some of the issuers have mitigating strategies, resources or rating headroom that could place them at less immediate risk.

For the building material sector, the financial profiles of major cement producers are already stretched following large M&A and high investment over the past few years. Slow demand recovery and oversupply situation could further delay the pace of deleveraging. Telecoms also face high capex need ahead of the 5G investment cycle. Ongoing price competition and weak data monetisation will continue to put pressure on revenue and earnings growth.

Weaker economic conditions are affecting the banking sector, said Parson Singha, Senior Director of Financial Institutions at Fitch Ratings Thailand.

The magnitude of the impact depends on the downturn's severity and duration, but we expect banks' asset quality and earnings to be significantly weaker in 2020 compared with prior years. SMEs make up around one-third of bank lending and are particularly vulnerable to economic shocks.

Furthermore, bank earnings, even before the outbreak, had already been under pressure due to low interest rates and slowing fee income growth. The business outlook is weak, although the banking sector has sound buffers that protect against downturns - for example, as of end-2019, the common equity Tier 1 ratio was 16 per cent and the loan loss reserve coverage was 145 per cent . Domestic liquidity also remains relatively strong.

Related story:

Fitch revises outlook on Thailand to 'Stable' ; affirmed at 'BBB+'

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