FINANCE
Secure footing challenged
Thai banks are expected to post generally stronger profits for 2008, thanks to lower provisioning expenses and higher net profit margins.
But rising inflation, fuel prices and domestic political uncertainties remain key risk factors, and many banks have already begun warning that loan growth could slow in the second half.
First-quarter bank profits rose an impressive 23.9% from the same period last year, led by Siam Commercial Bank, Bangkok Bank and Kasikornbank.
Two second-tier banks - TMB and Siam City Bank - showed the highest rebounds in percentage terms, with first quarter earnings up five to six-fold from last year due to lower provisioning expenses.
Loan growth also rose impressively over the first four months, with Bangkok Bank, Krung Thai and Kasikornbank each posting growth of more than 5% from the end of 2007.
Interestingly, SCB, the country's third-largest in assets, saw its loan book end April practically unchanged from the end of 2007. This even as the bank's first-quarter profits led the sector at 6.78 billion baht, up more than 83% from the same period last year. Gains were led by growth in non-interest income, investment earnings and lower operating expenses.
SCB president Kannikar Chalitaporn cautioned that it would be tough for the bank to maintain profit growth through the next several quarters.
"I don't think that business performance in the second quarter would be better than the first quarter. We had quite a strong performance in the first three months," she said.
"If the bank's business operations in the remaining quarters of the year are as good as the first quarter, that will be good enough for us."
Mrs Kannikar said lending trends weren't expected to change significantly in the second half, even with the launch of the government's new infrastructure megaprojects.
The 1.7-trillion-baht megaprojects are expected to be financed through a combination of bank loans, foreign loans and state budget spending. But bank lending is not expected to begin in earnest for the projects until late this year or 2009.
Macroeconomic risk was another key issue for bank trends. Energy prices, in particular, remain a heavy risk for the economy and banking sector, as rising prices would only dampen demand and consumption, hurting loan growth and potentially leading to a decline in asset quality.
Political uncertainty is another question mark, although one with more direct impact on the equities market and investor sentiment than on bank profitability. Yet continued unrest, let alone outright violence between security forces and anti-government protesters, can only negatively affect consumption and investment, particularly foreign direct investment.
Prasarn Trairatvorakul, the president of Kasikornbank, said local banks did see political uncertainty as a major risk factor for the second half.
"Uncertainties will only add further weight to the existing problems of rising expenses and cost of living, affecting consumption and investor confidence," he said.
Higher fuel prices will result in higher business costs and lower profit margins for companies and lower disposable income for consumers.
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| Attractive rates are generally an effective weapon in promoting more lending, but rising inflation triggered by high oil and food prices, plus sagging confidence among consumers and investors over politics, are likely to put a lid on demand. |
Kasikornbank, while targeting loan growth of 10% to 15% this year, has tightened its credit-lending procedures and risk-management practices in light of a more challenging environment.
Meanwhile, Syrus Securities expects second-half bank earnings to decline as a result of the political and economic uncertainties.
Growth across the region was being revised downwards as a result of inflation and expectations that monetary policy must be tightened to help stabilise prices.
Locally, politics and the uncertainties over the stability of the government can only mean risk for policy continuity.
"The political situation is repeating the experience of two years ago," said one Syrus analyst, referring to the widespread protests in Bangkok that ultimately helped lead to the September 2006 coup and downfall of the Thaksin Shinawatra government.
"Certainly the street protests [by the People's Alliance for Democracy] have affected confidence, and with that we could see loan growth slowing in the second half."
BANKING REFORMS
End of blanket guarantee
SOMRUEDI BANCHONGDUANG
The banking system is poised to undergo its largest change in years this August with the launch of the new Deposit Insurance Agency.
Since 1997, depositors have had their funds fully guaranteed with the backing of the Bank of Thailand's Financial Institutions Development Fund.
But the launch of Deposit Insurance Agency will replace the blanket guarantee with a limited insurance programme that will cap coverage to just one million baht within five years, a limit authorities say is sufficient to cover up to 97% of all deposit accounts in the system.
At the same time, the programme will help introduce market discipline into the financial system, as banks will no longer have the blanket state guarantee to rely upon in competing for deposits.
Product pricing is also expected to become more varied and sophisticated, particularly among smaller banks lacking the scale and scope of their larger competitors.
Limited deposit protection also means that consumers will have a greater need to do their homework about the stability of a given institution.
Authorities say that premium rates for the new programme will be the same as the 0.4% on deposits charged today by the Financial Institutions Development Fund. But premium rates are expected to vary sometime in the future, with more stable, financially strong banks paying less than others to compensate for lower risk.
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| People hunt for latest financial bargains and at the Money Expo 2008. With the introduction of the Deposit Insurance Agency, state guarantees for bank deposits will gradually be phased out. |
Bankers say while they expect little significant shifts in deposit flows in the immediate term, the move to limited deposit guarantees could help accelerate the trend towards more sophisticated money market instruments among savvy depositors seeking higher returns within acceptable risk.
Money market funds, which invest primarily in short-term treasury bills or central bank debt instruments, are already very popular among depositors given that risk for state-issued debt is essentially sovereign risk.
Prasarn Trairatvorakul, the president of Kasikornbank, said depositors will increasingly be able to choose among bills of exchange, structured notes and other financial products as an alternative to deposits.
While banks remain overwhelmingly dependent on plain savings and fixed deposit products for their financing, he said the growing sophistication of the market and investors gave financial institutions greater leeway as well in managing their liquidity.
BANKING REFORMS
New rules tighten safety nets
SOMRUEDI BANCHONGDUANG
Thailand's commercial banks will adopt the Basel II financial standard at the end of the year, a move aimed at improving risk-management practices, more efficiently matching capital requirements to risk and strengthening the overall stability of the financial system.
The existing capital standard, known as Basel I, was adopted decades ago as a rough guide to determine the amount of capital banks must reserve to cover credit and market risks. For instance, the best-known principle of the standard calls for Thai banks to maintain capital funds - equity and subordinated debt - of at least 8.5% of their risk assets, which are primarily loans.
The Basel II standard, initially published in 2004, aims to improve on the existing framework by forcing banks to look at other types of risks, such as operational risk. Analysts estimate that the new standard will increase capital requirements by a full percentage point, although this will vary depending on the composition of each bank's loan portfolio and the readiness and comprehensiveness of its risk management practices.
Risk weightings for different types of loans will also be adjusted. Mortgage loans, for instance, will have their risk weight reduced to 35% under Basel II from 50% now, meaning that from a bank's perspective, less capital is required to cover a given housing loan. Auto loans and small and medium-sized company loans also will have their weightings reduced, resulting in many banks already moving to expand their presence in the two markets.
The Basel II framework, drafted under the Bank for International Settlements, calls for banks to use one of two methods to calculate their capital needs.
The first is known as the standardised approach, where credit ratings are used to assess the relative risk of a borrower and derive the minimum capital required to serve as a reserve. Thai banks are expected to use this method for the next several years to comply with Basel II.
The second, more sophisticated method, is known as the internal ratings-based approach, where banks are allowed to use their own risk models to allocate capital. This approach is expected to be used by leading international banks.
Capital allocation is only one of three "pillars" outlined under the Basel II framework. The second pillar calls on regulators to strengthen supervisory systems and establishes a framework to deal with various bank risks, such as legal risk, reputation risk or liquidity risk.
The third pillar meanwhile aims to impose market discipline on institutions by increasing the disclosures required by banks.
