Banks: profits, risks and expectations

Last year, the top four commercial banks showed combined earnings of well over Bt100 billion. Among them, Bangkok Bank posted Bt33 billion, Krungthai Bank Bt23.52 billion, Siam Commercial Bank Bt40.22 billion and Kasikornbank Bt35.26 billion.

That seems excessive, doesn’t it? 

Not to bankers, who are determined to further boost those numbers.

“Those figures may sound high,” one banker commented, “but I would say they are not.” 

He backed this up by the saying that if all the net profit and loss over a bank’s long history were taken into account, the bank would be lucky if its balance sheet remained in the black.

His words brought to mind the case of Lehman Brothers. Founded in 1890, the US investment bank had good and bad years. But it must have performed strongly in many years or it could not have survived for over a century. Yet a bad business strategy led to its shocking demise in 2008, when it was forced to file for a bankruptcy whose impact is still resonating through the financial world today.

Likewise, despite huge profits – a record Bt38.5 billion in the first nine months of this year – Siam Commercial Bank, Thailand’s oldest at 109 years, could be wiped out if it takes a wrong turn.

Operating in today’s business world entails a number of risks, noted another banker, the foremost being political.

Global markets almost came to a halt when American politicians failed to reach a compromise on the budget recently. You can also blame politics for the 2008 financial crisis, which wouldn’t have happened if American politicians had not had such high confidence in then Federal Reserve chairman Alan Greenspan.

After stepping down in 2006, Greenspan denied that the crisis was his fault, but he conceded that the meltdown had revealed a flaw in a lifetime of economic thinking and left him in a “state of shocked disbelief”. In office, he was lauded for showing faith in the free market, which spurred spending. That faith, however, led to a build-up of complexly structured financial papers among American banks including Lehman Brothers.

Like financial institutions across the world, Thai banks were not spared from the crisis. In 2009, combined net profits of Bt92 billion showed a 6.6 per cent decline from the Bt99 billion recorded in 2008. 

Politics at home carry equal weight. The banks’ performance in 2009 could have been better had Suvarnabhumi Airport not been shut down by protests in late 2008, shattering foreign investors’ confidence in Thailand.

With more than Bt173.9 billion in net profits last year, Thai banks this year are bracing for fresh trouble that might arise from nationwide protests against the government’s amnesty bill. Bankers are now praying that a non-violent compromise can be reached.

Making this more vital is that next year, Thailand will need to mobilise all resources and support in preparation for the Asean Economic Community’s launch in 2015. A political upheaval would torpedo Thailand’s potential to grow regionally. It is worth adding that the political tension is climbing at a time when the economy is going downhill, with lower-than-expected export growth. Domestic consumption and investment is also heading downwards.  

Banks must also strictly comply with rules. In 2007, their net profit after provision and tax was just Bt25 billion because of the new accounting standard for loan valuation.

Competition is increasing, and Thai banks are reaching out to new clients and opening new branches. Transformed into one of the biggest players in retail banking, Siam Commercial Bank now has over 1,300 branches. With more Thai companies investing overseas and more foreign companies arriving here, local banks are also seeing increasing competition from their foreign counterparts, who are making their presence felt in the Kingdom.

Last weekend, a recorded sermon by the late Supreme Patriarch titled “Pretending to be Dead”, was played on the radio. In it, he said it was sad to see news of a thief murdering another man for his valuables. He went on to note that all people would die, and do so soon. But despite knowing that no material goods could alter that fact, they still search for wealth.

At an individual level, it is possible for some of us to contain our lust for wealth. But for banks, with their long list of stakeholders, that’s totally impossible. Furthermore, the Stock Exchange of Thailand might not like it if banks curbed their financial lust, given that banking enjoys the second-highest profits of any sector in Thailand and, accordingly, lures huge investment. Keep your eyes open for the next quarterly results. They will never cease to surprise.