TRIS Rating maintains a “Stable” outlook for the Thai banking industry. Despite the sluggish Thai economy and the recent rise of non-performance loans, most of the Thai banks have been able to generate considerably good results and continue strengthening their capitals. Overall loan growth for the whole industry is expected to continue its slow pace into the first half of 2018. The persistent weak demand for loans in the corporate segment is likely to continue, whereas banks have slowed down their lending in the SME segment given the sharp rise of delinquency in the recent years. The deterioration in asset quality, particularly in the SME segment, has started to stabilize with most of the banks expected to report declining credit costs starting the second half of 2017. The Thai banks’ ability to largely maintain their net interest margins notwithstanding the low interest rate environment and their accumulated excess loan loss reserves, have proved to be critical to weather the recent deterioration in asset quality, and deflect any severe impact on profitability. The liquidity in the Thai banking system is expected to remain high given the weak demand for loans and the strong base of system-wide funding from domestic depositors.
Loan growth is expected to continue its slow pace into first half of 2018
The combined loan assets of Thai banks grew by only 2% in 2016, below the country’s GDP growth rate of 3.2% of the same year. With no sign of significant recovery in private investments and continued sluggish performance in the export sector in spite of a slight pick-up in the first quarter of 2017, the demand for loans in the corporate segment is likely to remain weak in the medium term. The proportion of loan assets in the corporate segment against the total loan assets of Thai banks continued to shrink, to 29.2% in 2016 from 33.6% in 2012. Against the rise in credit costs, those banks that have SME loans representing a major portion of their loan portfolios, have tightened their underwriting criteria and sharply slowed down their SME lending. The year-on-year loan growth in the SME segment was only 1.4% in 2016 compared to the peak of 14% in 2013. Faced with the prospect of near zero growth in the corporate segment and higher risk in SME lending, some Thai banks have shifted their focus to the retail segment. However, except for housing loans, the demand for loans in the retail segment has not been great either given the slack domestic consumer spending.
The growth prospect of consumer credits is also constrained by the country’s high household debt relative to its GDP – the ratio stood at 79.9% at the end of 2016. Some of the mid-sized and small banks that have automobile hire purchase lending as their core businesses have experienced negative or zero growth on their loan assets over the past few years, as domestic car sales had been on the decline since 2013 before picking up slightly in the first quarter of 2017. Most of the large and medium sized banks have targeted to expand their mortgage loan portfolios, but at the same time tightened their underwriting criteria in response to the rise of mortgage loan delinquency. The banks’ more selective lending practices imply a shrinking pool of bankable credits which is not helped by the decelerating pace of new development projects in the real estate market.
NPL expected to peak in first half of 2017
The NPL ratios in the SME segment and the retail segment continued to rise and reached 4.35% and 2.71% respectively in 2016. The other key ratio that indicates a change in asset quality is the ratio of loans classified as special-mention loans (loans more than 30 days overdue). As of year-end 2016, the special-mention loan ratio for the whole industry was 2.63%, rising from 2.38% at the end of 2015. A significant portion of the deteriorated loans in the SME segment and the corporate segment have been restructured; some of the restructured loans are not counted as classified loans. However, the combined ratio of NPL and special-mention loans for the whole industry which has been on the rise since 2012, is expected to peak in the first half of 2017 and stabilize thereafter. Banks are taking a more cautious approach when booking new loans and capping their exposure in the high risk segments.
Net interest margin expected to remain largely unchanged
Notwithstanding the persistent low interest rate environment, Thai banks have managed to protect their interest margins over the past five years. Large banks recently cut some of their lending reference rates by 50 basis points in response to social pressure to support needy SME borrowers. Despite the recent cut, TRIS Rating does not foresee any significant change in the industry-wide net interest margin in the medium term. Banks’ ability to push down their funding costs against drops in loan yields has been helped by the relatively calm deposits market. The slow growth in loan assets had decelerated the drive to attract more customer deposits, creating room for banks to lower their deposit rates and cut their funding costs in tandem with the drop in lending rates. The ability to maintain net interest margins is critical for banks to protect their profitability given the rise of credit costs.
Strong capital and over-reserved positions provide a strong base for future growth
notwithstanding the lackluster economy. Internally generated capital, primarily through expanded retained earnings, has been a source of strength. The capital adequacy ratio, inclusive of Tier I and Tier II capital, for the whole industry rose from 16.31% in 2012 to 18.04% at the end of 2016. Most Thai banks have consistently had loan loss reserves in excess of the regulatory loan loss reserve requirements (over-reserved). Over-reserved positions helped cushion the rise of required reserves during the past two years, and deflect any severe impact on the banks’ profitability. Profitability dropped in 2015 and 2016, mainly a result of the rise in credit costs. TRIS Rating sees this drop as a normal amount of volatility through a credit cycle, with no significant impact on the overall risk profile of the Thai banking industry.
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