While
battling problem loans, bureaucratic local banks have been
forced to sharpen their act by the entry of lean foreign
players
Now performance is everything
Cholada Ingsrisawang & Chiratas Nivatpumin
Local commercial banks continued
their struggle for survival in 1999, trying to overcome the damage
wrought by the financial crisis in the previous two years.
Non-performing loans, while peaking in the second quarter, remained
stubbornly high throughout the year, despite low interest rates,
a gradual improvement in economic prospects and new bankruptcy
and foreclosure regulations.
While capital constraints and bad loans preoccupied immediate
thoughts, long-term prospects remain even more tumultuous for
local institutions.
Many analysts agree the sale of nationalised banks to top foreign
institutions will unleash sweeping competitive pressures on existing
banks in the next few years.
These sweeping changes have forced local banks to implement new
risk management systems, downsize operations and sharpen their
business focus in preparation for a more competitive industrial
landscape in the future.
Capital woes
The central bank required local banks and finance companies to
set aside loan-loss provisions of at least 60% of their total
needs by the end of the year, with full coverage by the end of
2000.
Non-performing loans for commercial banks at the end of September
totalled 2.4 trillion baht, or 44.58% of total outstanding credit,
down slightly from the peak in May of 2.55 trillion or 46.81%
of outstanding credit.
But
despite progress in debt restructuring, nearly all financial institutions
were faced with the need to raise new capital in 1999 to cover
provisioning needs and maintain capital funds within the 8.5%
minimum required by the central bank.
Depressed equity markets made capital securities a favoured new
instrument for many banks. Large depositors flocked to the new
instruments, a blend of preferred shares and subordinated debentures
offering yields from 11% to as high as 23%.
Thai Farmers Bank was the first in the market, raising 40-billion-baht
in January through the issue of subordinated debt and Slips (Stapled
Limited Interest Preferred Stock).
Bank of Ayudhya followed in March, raising 26 billion baht, just
under its original 30 billion target. Bangkok Bank in April raised
40 billion baht under a similar Caps (Capital Augmented Preference
Shares) scheme.
DBS Thai Danu raised more than 15 billion baht in a three-step
programme: a 5.5-billion-baht rights issue to existing shareholders,
a 6.6-billion-baht Caps issue and a 1.5-billion modified Caps
issue to majority shareholder Development Bank of Singapore.
Thai Military Bank announced a Super-Caps issue in May, raising
12 billion baht.
The capital securities allowed institutions to raise new funds
without ceding management control, albeit at a high cost. Overall,
the five banks raised some 124.6 billion baht in funds through
Slips or Caps programmes in 1999.
But by mid-year, it became clear that the funds raised were not
enough to cover provisioning needs and bad loans. Only Siam Commercial
Bank, which had made full loss provisioning earlier in the year
under terms of the state recapitalisation programme, posted an
operating profit in the third quarter -- other firms continued
to post losses to bolster provisions.
The central bank, concerned about the ''quality'' of capital
being raised, announced that institutions could issue capital
securities up to a maximum of one-third of their tier-one capital
funds.
In one concession, local institutions would be able to apply
funds raised through capital securities to satisfy requirements
for state aid under last year's August 14 financial restructuring
programme.
Regardless, analysts agreed that banks were only buying time
before new equity would have to be issued.
Bank of Ayudhya in June raised 17 billion baht through the private
placement of 850 million new common shares at 20 baht each.
Thai Farmers Bank raised 23.5 billion baht through a rights issue
in October of 1.175 billion new common shares at 20 baht each.
Bank of Asia raised 13 billion baht through a rights issue in
November of 1.24 billion new shares at 10.5 baht each.
But not all proved successful. Thai Military Bank in October
abruptly cancelled its plans to raise 20 billion baht in new funds
by issuing two billion new preferred shares, citing poor market
conditions.
The bank had planned to issue half of the preferred shares to
the Finance Ministry under the August 14 recapitalisation scheme,
with the rest placed with foreign institutional investors.
But prices suggested from the bank's overseas roadshow fell well
under the 15-baht per share target, leading executives to announce
a delay in recapitalisation until the first half of 2000.
The central bank said local institutions at the end of the third
quarter had loan-loss provisions of 351.76 billion baht, just
120.96 billion below their end-2000 target.
Regulators said if provisions were made immediately, private
banks had to raise at least 37 billion baht in new capital to
meet minimum provisioning requirements.
A more detailed analysis by the central bank was made in early
December, taking into account debt restructuring progress, assumptions
on operating performance and loan quality deterioration.
More than 41 billion baht in new capital would be needed by seven
private banks by the end of 2000 assuming average monthly debt
restructuring of 22 billion baht, 10% deterioration per quarter
of substandard loans, operating performance in 2000 on par with
1999, and a 30% loss rate on restructured loans.
If loss rates were 50%, new capital required by the seven banks
would more than double to 94.6 billion baht, the central bank
said.
Debt restructuring
To reduce capital pressures, all banks announced their top priority
was rehabilitating bad loans.
Corporate debt restructuring accelerated in the second half,
helping many financial institutions to post improved non-performing
loan figures by the third quarter.
At the end of September, regulators reported 120,433 restructured
cases, totalling loans of 762.7 billion baht, since December 1998.
Another 22,755 cases were under restructuring, involving loans
of 1.15 trillion baht.
The
central bank's Corporate Debt Restructuring Advisory Committee,
which monitors major debt restructuring cases involving multiple
creditors, said 132 firms involving debt of 341.8 billion had
been restructured by mid-November.
Another 300 firms with debt of 585.7 billion baht were under
restructuring, with 210 firms with debt of 413 billion under court
handling.
According to the central bank, most restructuring cases should
be completed within 4.75 months, although extensions and delays
can result in talks extended to seven months.
Debtor-creditor and inter-creditor agreements call for cases
to be forwarded to the court if talks fail.
As of mid-November, a total of 253 bankruptcy suits had been
filed with the Central Bankruptcy Court, including 32 cases transferred
from civil court. Another 23 firms have filed for business restructuring
under the Business Reorganisation Office.
The advisory committee in June announced it would expand its
scope to include small- and medium-sized enterprises. As of October,
2,801 borrowers with total loans of 218 billion baht had accepted
the ''Simplified Agreement'', which calls for restructuring talks
to be completed within 60 days.
The Finance Ministry eased tax obstacles and charges to ease
the task of setting up asset management companies.
Regulators hoped that separating bad loans into separate asset
management companies would help increase efficiency at local banks
in recovering bad loans.
Provisioning needs would also be reduced for a given loan if
a bank held less 49% or less in an asset management firm.
Thai Farmers Bank was the first to announce plans to do so, setting
up Chantaburi Asset Management Co to take over loans of defunct
subsidiary Phatra Finance in a deal negotiated with the central
bank.
The bank would transfer 80-billion-baht worth of its own bad
loans to a separate wholly-owned asset management firm, sold at
a discount of 50% and managed by contract by GE Capital and Goldman
Sachs.
Bangkok Bank set up a subsidiary, Sinnsuptawee Asset Management
Co, with capital of 500 million baht to handle foreclosed assets.
Siam Commercial Bank and Krung Thai Bank have both announced plans
to set up their own asset management firms in early 2000.
Cost cutting
Nearly every bank announced early retirement plans in 1999 in
an effort to cut future costs.
New technologies, such as Internet and electronic banking, offer
institutions the chance to reduce staffing needs for retail banking
services.
The central bank also announced plans to liberalise branch regulations,
allowing banks to freely open or close bank branches based on
their operational plans.
Many institutions quickly began drafting plans to introduce new
limited branches, offering common account services but shifting
most credit services to larger provincial or regional centres.
Krung
Thai Bank, which absorbed 101 branches in its merger in 1998 with
First Bangkok City Bank, announced plans in November to close
35 branches nationwide by the first quarter. The changes would
bring the state bank's branch network to 620, still the largest
in the sector.
Other banks are likely to follow, once regulators formally clarify
standards and criteria used for branch closures.
New investment in computer and information technology was announced
by many firms, not only to guard against Y2K, but also to set
the stage for the future.
Upgrading risk management and network links was ranked as a top
priority for many banks in the aftermath of the financial crisis.
The central bank also announced that internal controls and risk
management would receive heightened attention in its efforts to
supervise and regulate the financial system.
For 2000, regulators are expected to increase their efforts to
encourage good governance at local banks.
At the same time, with economic conditions improving, many institutions
plan to raise their marketing profile and sharpen their business
focus ahead of increased competition and lower interest rate spreads
in the future.
But
despite progress in debt restructuring, nearly all financial institutions
were faced with the need to raise new capital in 1999 to cover
provisioning needs and maintain capital funds within the 8.5%
minimum required by the central bank.
The
central bank's Corporate Debt Restructuring Advisory Committee,
which monitors major debt restructuring cases involving multiple
creditors, said 132 firms involving debt of 341.8 billion had
been restructured by mid-November.
Krung
Thai Bank, which absorbed 101 branches in its merger in 1998 with
First Bangkok City Bank, announced plans in November to close
35 branches nationwide by the first quarter. The changes would
bring the state bank's branch network to 620, still the largest
in the sector.
