Major changes ahead  

Banks have shifted their focus to the retail segment, with new services, such as Bank of Ayudhya's drive-through facility, to attract customers.

The 1997 crisis plunged local banks into a desperate fight for survival, a period marked with capital calls, cost-cutting and debt restructuring. But by 2000, local banks had turned a corner, and entered into a different phase, one highlighted by channel expansion, rebranding and internal restructuring.

Starting in 2004, the challenges have become more strategic, as institutions wrestle with the implications and opportunities afforded from sweeping regulatory changes that potentially will lead to a much different Thai financial sector in the years ahead from that of today.

Analysts and authorities have long questioned whether Thailand was overbanked. While the economic crisis saw a handful of banks and dozens of finance companies vanish from the system, as of early 2004, more than 80 local and foreign banks, finance companies, credit fonciers and Bangkok International Banking Facilities continued to operate in the market.

No longer. The stated goal of the Financial Sector Master Plan, passed early in the year, is to spur consolidation within the sector, open new opportunities for banks under a "universal banking" concept and ensure that Thai institutions can build up the resources and strength to cope with increased competition in the future. Two other key goals of the master plan are to expand financial services to rural communities and enhance consumer rights.

Finance companies, long the stunted cousins to the larger commercial banks, will be set to disappear altogether from the financial system, with existing operators offered the choice of upgrading to full-service bank licences or retail bank licences, which are limited to lending to consumers and small- and medium-sized businesses as well as prohibited from offering treasury and derivative products. Credit fonciers, whose importance in providing home mortgage loans has long been superseded by commercial banks, will face similar pressure to consolidate and upgrade to bank licences.

International banking facilities, set up in the early 1990s to serve as a conduit to draw foreign capital to the country, will also face elimination under the master plan, as local and foreign banks must now operate under a "single presence" concept aimed at streamlining the sector and improving efficiency in regulatory oversight.
Authorities have announced that the results of new licence applications will be announced throughout the first half of 2005. Two larger finance companies, Tisco and Kiatnakin, are already expected to win their bids to upgrade to full-licence bank status, while AIG Finance and Book Club/Land and Houses Credit Foncier are tipped to receive retail bank licences.

Overall, 11 groups of local financial financial institutions have submitted upgrade plans, including four for full-service bank licences and seven for retail bank licences. Two other institutions have petitioned to reduce their status to credit companies, which will face prohibitions from accepting public deposits.

Among foreign banks, the large majority have sought to maintain their existing full branch status, with only one application made for subsidiary bank status and the ability to open new branches. Another 27 financial institutions have submitted merger plans under the single presence concept, mostly covering their international banking facilities. For the first several years at least, few expect the new entrants to pose much of a challenge to the larger established banks. More likely is that the new banks will seek to leverage their existing strengths, such as hire-purchase or wholesale banking, to build up their market niche and only then look to expand into other areas.

Full-scale retail banking is unlikely to be a focus for any of the new players, not when considering the huge investment costs that would be required to build up the scale needed to challenge
The universal bank strategy

IT'S BEEN a banner year for Thai banks, thanks to robust economic growth, healthy loan growth, improved margins thanks and declining non-performing loans. Nine-month profits for listed banks totalled 64.29 billion baht, or more than double the profits reported for the same period in 2003.

Yet despite healthier balance sheets and a more favourable macroeconomic environment, local bankers say the lessons of 1997 remain foremost in mind _ given domestic and overseas uncertainties, 2005 will offer little room for complacency.

"In 2005, the Thai economy will see growing volatility from foreign exchange uncertainties, something that has not really been a factor for the past four years," says Khunying Jada Wattanasiritham, the president of Siam Commercial Bank. Growing market volatility will place a premium on risk management, she said.
At the same time, regulatory changes under the financial sector master plan will also present both new opportunities and threats for existing institutions.

Siam Commercial Bank, like its peers Bangkok Bank, Kasikornbank and Krung Thai Bank, has adopted a strategy of being a "universal bank" to both corporate and retail customers alike, whether it be credit products, investment advisory services, insurance, leasing or more sophisticated financial solutions.
For Khunying Jada, it's a strategy that fits in well with SCB's strong focus on risk management. By diversifying its customer portfolio and business services, the bank can minimise the potential impact of a downturn in any one particular sector.

"Being a universal bank means greater variety. Not just variety in terms of customer choice, but also variety for our own business operations," Khunying Jada said.
She noted that while corporate banking had been relatively flat over the past several years, overall performance had remained stable thanks to strong gains in the bank's retail and home mortgage operations.
SCB also plans to continue its initiatives to focus more on financial services in 2005 to help build up fee-based income.

Advisory services will be a key aspect distinguishing one institution from the next, particularly for corporate customers who have the size and bargaining leverage to demand added services and price from their bank.
The resurgence of the capital market, demand for new investment and uncertainties in currency and interest rates will all lead to growing demand for hedging products, treasury services and project financing, she said.
The trends towards disintermediation, where companies eschew banks and go directly to investors in the equity and bond markets, was not necessarily a threat, she said, but actually offered greater opportunities for banks to expand its service offerings.

On the retail side, growth opportunities will centre on asset management and insurance offerings for depositors seeking higher returns.

"For the existing Thai banks, the advantage remains in their national branch networks. Each bank over the past several years has invested heavily in building up and improving their retail channels to help expand their presence in the market," she said.

But even with efforts by local banks to boost fee income, interest income remains the main driver for local banks. For Siam Commercial Bank, loans still account for some 60-70% of the bank's revenues, although fee-based income is expected to continue to grow as a share of total income over the next several years.

The bank expected loan growth of 6-7% in 2005, in line with overall economic growth projected at 5-6%.
"We will never see double-digit loan growth as in the mid-1990s. If we did, it would be actually cause for concern. Prudential growth, with an eye and understanding for the risks, is our focus," she said.

_ DARANA CHUDASRI the incumbent banks in Bangkok, let alone nationwide.

For the existing banks, the top five _ Bangkok Bank, Krung Thai, Kasikornbank, Siam Commercial Bank and Bank of Ayudhya _ placed much of their focus in 2004 on improving their retail image and ensuring that the right elements were in place to offer the full range of financial services, ranging from insurance to asset management to securities brokerage and investment. All five have already committed to serving as universal banks, catering equally to corporate and consumer customers.

Also in this tier is Thai Military Bank, which through prodding by its major shareholder, the Finance Ministry, launched a merger with DBS Thai Danu Bank and the Industrial Finance Corp of Thailand. With the merger, TMB now stands as the fifth largest bank in the country in terms of assets.

The Dutch giant ABN Amro Bank, meanwhile, sold off its 75% stake in Bank of Asia to Singapore's UOB, citing a desire to focus its resources in the region on operations in China and India. ABN Amro will maintain its full branch office in Thailand, servicing corporate clients. And under the single presence concept, UOB is in the process of merging Bank of Asia with UOB Radanasin, a transaction expected to be completed in 2005.

BankThai, one of the smaller banks in the system, also hopes to expand its current focus on wholesale banking to retail banking in a bid to increase its scale.

It's a strategy that has also been adopted by two state-owned banks, the Government Savings Bank and the Bank for Agriculture and Agricultural Co-operatives. Both banks boast a customer base and network that compare with those of the largest private banks, albeit concentrated largely in rural areas and targeting lower income groups. To better leverage their networks, both the GSB and BAAC have been studying ways of expanding its services to include consumer products such as credit cards, debit cards and personal loans.

The Thai Rak Thai government has used both the GSB and the BAAC as key instruments in pushing forward its community development strategy, with the GSB holding the lead in initiatives such as the People's Bank microfinance programme and the village investment funds, while the BAAC oversees initiatives such as the farm-debt restructuring programme.

Indeed, some analysts have expressed concern about the potential risks faced by the two state banks, as well as the distorting effect they have in competing with private banks. Policymakers however argue that asset quality at the two banks actually is higher than for the private banks. And according to central bank surveys, both the GSB and BAAC play a key role in providing financial services to rural communities that otherwise have been ignored by private banks.

FURTHER CHANGESLocal banks will face another key challenge in 2005, when a new law establishing a deposit insurance agency is expected to be passed.

Since 1997, the central bank's Financial Institutions Development Fund has offered a blanket guarantee for all deposits within the banking system. With the financial sector now on relatively sound footing, authorities want to remove this safety cushion and allow market forces to play a greater role in the operations of the sector.
Deposit insurance will be phased in over a four-year period, with coverage of up to 50 million baht given in the first year and falling to just one million by the fourth year. The agency will share broad regulatory powers with the Bank of Thailand, and have the authority to collect premiums of up to 1% of deposits per year from local institutions.

Authorities say that the one-million-baht ceiling for insurance coverage is sufficient to protect the vast majority of bank accounts within the system. Even so, the thought that deposits will now no longer be fully protected will certainly place pressure on institutions to improve their operations and stability.

While Thai banks continue to boast loan-to-deposit ratios of less than 1:1, with excess liquidity counted as high as 500-600 billion baht in the financial system, few bankers expect such conditions to last forever. Steady loan growth will eventually see institutions return to a competition for deposits, while the concept of limited insurance coverage will give the largest, most stable institutions an inherent advantage in the public eye.
The shift away from "risk free" deposits also has implications for the capital market. Fund managers anticipate renewed interest in capital-protection funds or short-term money market funds once the limited deposit insurance programme takes effect. A third change to the system, in addition to the master plan and limited deposit insurance, is expected to come in 2006, when international banks are expected to begin adopting new guidelines on how capital is set aside to cover risk.

Known as Basel II, the accord has been developed under the auspices of the Bank for International Settlements and is expected to be adopted by banks operating in all developed countries.

The new guidelines include significant changes in the risk weightings for different asset classes, and also require banks to set aside reserves to account for risks such as market risk and operational risk. Thai banks have already begun preparing for the domestic adoption of the rules, expected to come in 2007-08, by strengthening their risk management functions and enterprise systems. The changes in the risk weightings will also have profound implications for the different market segments pursued by banks and how loans are priced.


Getting more out of life

Executives gather at the East Asian Insurance Congress held in Bangkok in late November.

LIFE INSURANCE products are expected to offer higher yield in 2005 year from the average 4-5% in the previous year in line with rising bond yields.
"Today most companies are selling products which offer yields of 4-5% . This will probably go up to 4-6% in 2005 as bond yields rise," said Donald Carden, president and CEO of Siam Commercial New York Life Insurance Plc.

"I think savings products will continue to be popular. Moreover, I would not be surprised to if there is no pickup in demand for unit linked policies as some people expect. They have minimum guarantees but I think, if bond rates rise we can raise our own guarantee rate to 5-6% and it is very difficult to beat a product which has a 6% guaranteed policy."

Mr Carden said that the effects of the current scenario of rising interest rates would be very positive on the industry.

If interest rates go up, it means the insurers get higher yields on their bond holdings and they can provide additional services to their customers which will be reflected in their new products
"If we remember, three years ago, we all sold products with guaranteed yields of 5-6% then down to 4% as the bond yields fell. I would imagine that most companies will start offering higher minimum guarantees."

In comparing life insurance policies against other long-term funds, mutual funds, and long-term equity funds (LTF), Mr Carden said that besides life protection and security, life insurance products offered more competitive advantages.

Recently, mutual funds have not performed well due to the sluggishness of the equity market.
"I think most people have a very difficult time outperforming a guarantee policy of 5-6% and I think if you are going invest in mutual funds, you must take into account that anything can happen. You have to take risk. Life insurance offers real guarantees. I think we have huge advantages over those types of investment vehicles for consumers who need maximum earning without any risk."

Mr Carden is also upbeat about the impact of the increase of annual income tax deduction for life premiums from 50,000 baht to 150,000 baht.

The Finance Ministry has already approved in principle the proposed higher tax deduction. "This is a major plus for the life industry and we have to thank the government for supporting the industry and consumers.

There are tremendous reasons for consumers to buy life products and this will greatly drive life business and the growth rate in 2005. It will also be a great motivation to encourage Thai consumers to increase their savings and exercise tax privileges as well as raise long-term savings funds for the country."

According to Mr Carden, the Thai life insurance industry as a whole would expand in 2005 even though some larger insurers are struggling badly this year and that may continue to do so next year.

"I think the industry's growth would be between 10-15% in 2005. I expect our growth would be twice the industry's average in 2005, simply because we have a multi-distribution channels strategy and the great success of our bancassurance which will continue to pay dividends to us until 2005 year and give us a big advantage over our competitors that do not have such distribution outlets," he said._ CHAROEN KITTIKANYA


Consumer finance market set to slow

Grpowth in the consumer finance market is expected to slow to 5-7% over the next few years due to higher interest rates and the sluggish capital market, a major source of wealth creation for many people.

IS THE consumer credit market poised for a collapse? Rapid growth over the past several years has pushed household debt levels to an average of 110,566 baht, or nearly double that recorded four years ago. Policymakers, while arguing that debt levels remain relatively low compared with other countries in the region, have tightened lending rules and sounded a caution about the impact rising interest rates might have on borrowers, particularly the poor.

The prospect of rising interest rates and the huge growth of the consumer market over the past several years have led most financiers to anticipate a slowdown entering into 2005.
"If we look at consumer finance over the next four years, the market is expected to show stable growth together with the economy," according to Niwatt Chittalarn, president and chief executive officer of Krungthai Card, the country's largest credit card issuer.

He said 2004 actually saw lower growth in the market compared with the previous year, thanks to volatility in the stock market.

"We're expecting 5-7% growth in the consumer finance market over the next several years, as we don't see a significant gain in the capital market, a major source of wealth creation for many people," Mr Niwatt said.
Expectations of higher interest rates will also lead consumers to take a more cautious approach to taking on new debt, he said, bringing overall market growth down to more modest, single-digit levels.

Personal loans were expected to see growth under 10%, as institutions faced growing challenges in coping with fraud, distribution challenges and regulatory restrictions.

"For the mass market segment, which focuses on lower income groups, competition will remain high, particularly from foreign firms such as GE, Aeon Thana Sinsap or newcomers such as Capital OK," he predicted.

The limited effectiveness of the national credit bureau would also lead many to avoid higher risk loans to lower income groups to focus on mid-market consumers with monthly incomes of 10,000 baht or more.

As a result, consumers can expect to see even more marketing innovations from financial institutions in 2005 seeking to maintain market share. Market segmentation, where products are tailored to specific groups such as young urban professionals, small businesses or new entrepreneurs, will increase going forward.

Mr Niwatt was more bullish about the credit card sector, saying growth of 20% was possible in 2005.
According to the Bank of Thailand, 6.4 million credit card accounts were outstanding at the end of September, an increase of 28% from the year before. Credit card spending in the first nine months of 2004 was 104.4 billion baht, up 25% from the year before. Outstanding credit card debt was 86.6 billion baht at the end of September, up 25.5%.

Mr Niwatt said credit card growth would be fuelled by local banks seeking to use cards as a value-added service for managing their existing customer relationships.

State policies to foster new entrepreneurs would also help create new markets for card issuers._ DARANA CHUDASRI