Economic Mid-Year 2001

More black than
red on the books

Darana Chudasri

BANKING

With a state-run asset management firm in the wings to help clear up problem loans, mos tretail banks have improved their performance.
However, worries over the risk of new loans turning bad have dampened the growth rate of new lending

For Thai banks, 2001 was to be the year of recovery, the year when the efforts of raising capital, cost-cutting and bitter negotiations with delinquent borrowers made over the previous four years would finally pay off.

But while bank operations across the sector have generally returned to the black, significant changes continued to be felt in the sector throughout a first half fraught with economic risks.

Leading the changes were the state banks, following exhortations by the new Thaksin Shinawatra government to improve operations, boost efficiency and take a leading role in lending to spur economic growth.

Krung Thai Bank saw its president, Singh Tangtatsawas, forced out in favour of Viroj Nualkhair, chairman of the Association of Securities Companies and an adviser to Finance Minister Somkid Jatusripitak.

For Mr Viroj, the priorities for the state-owned giant are clear-improve internal operations and efficiency and prepare for eventual privatisation.

Krung Thai Bank, with capital of 111.8 billion baht, is more than 96% owned by the Finance Ministry and the Financial Institutions Development Fund. Policymakers hope to eventually cut state holdings below 50%, resulting in Krung Thai losing its status as a state enterprise.

But with full privatisation months, if not years, away, the immediate goal for Krung Thai is to increase new loan growth and serve as a leading force for narrowing spreads between lending and deposit rates for the banking sector.

Two other state banks, Bangkok Metropolitan Bank and Siam City Bank, have similar mandates. Privatisation of both banks is expected to be completed by the end of the year, under a deal giving the Government Pension Fund and other institutional investors a 51% stake for an investment of around 11 billion baht.

Bad loans at both banks will first be stripped out and transferred to the new Thai Asset Management Corp, the state-owned debt workout vehicle approved by the government in June.

Both banks underwent changes in their boards and senior management as well.

Of the state banks, perhaps the least affected in the first half was BankThai. Operations continued to focus on boosting its corporate portfolio and expanding its brand image in the market.

RETAIL BANKING

For private bank executives, the first half of 2001 saw a sharp improvement for the better in financial performance. Most banks cut back sharply on new loan-loss provisions, following three years of steady losses owing to the need to boost reserves.

Interest-based income also picked up, as rate spreads widened owing to steady progress in debt restructuring, the impact of earlier cost reductions and a slight fall in funding costs.

Work continued on internal restructuring, product fine-tuning, IT upgrades and tweaking of risk controls and work processes.

Several of the largest banks, including market leader Bangkok Bank and Siam Commercial Bank, established regional centres under a hub-and-spoke model to take over credit-analysis and service functions for clients, allowing staff reductions at the branch level.

The trend for banks to focus on new marketing initiatives and products in the retail market continued in the first half, given the higher margins and broader customer base offered in consumer banking compared with the higher-risk corporate banking sector.

Foreign institutions such as GE Capital increased their hold in niche consumer loans. Two foreign-owned banks, Bank of Asia and DBS Thai Danu, also unveiled new consumer banking initiatives, largely led by new technology, to broaden their reach to young urban professionals.

DEBT RESTRUCTURING

One of the main pillars of the government's financial reform plan is the Thai Asset Management Corp, which will take over 1.37 trillion baht in bad loans from local banks by the end of 2001.

Operations of the TAMC are expected to begin in the third quarter, following the passage of the agency's legal framework in June. The agency will have sweeping powers to expedite debt restructuring and press borrowers to the negotiating table.

A total of 112,500 borrowers will be transferred to the TAMC, with 110,000 from state-owned banks and the rest from private banks.

Of the 1.3 trillion baht in bad loans going to the TAMC, only around 250 billion come will from private banks.

Assets will be sold at book value net of collateral, with payment coming in the form of 10-year bonds issued by the TAMC and guaranteed by the Financial Institutions Development Fund. Interest paid by the bonds will be tied to average deposit rates quoted by the five largest banks.

Selection of assets to be transferred by private banks was made solely by the Bank of Thailand. Qualified assets must involve outstanding debt of at least five million baht, must have some sort of collateral and involve borrowers with two or more creditors.

To prevent creditor disagreements, which held up restructuring under the central bank's Corporate Debt Restructuring Advisory Committee, the TAMC law all but forces banks to consent to the transfer. Assets must either be transferred in entirety or not at all, and banks choosing not to participate face an immediate examination by the central bank of assets, loan collateral and provisioning funds.

Private banks will split future profits and losses on the assets trans ferred to the TAMC under a set formula. The first 20% of losses are taken by the banks, the next 20% are split evenly between the banks and TAMC, with the remainder taken entirely by the state agency.

Overall, the transfer of bad loans to the TAMC is expected to help shave five percentage points from current sector bad-loan figures.

According to the Bank of Thailand, non-performing loans for Thai banks totalled 795.9 billion baht, or 19.4% of total loans, as of April. This is slightly higher than the 786.2 billion in bad loans, or 19.2% of total loans, reported in March.

But while most concede that pooling bad loans together into a single workout agency should accelerate restructuring progress, questions remain over the agency's operations, transparency and management.

The TAMC is also authorised only to take over assets which were classified as non-performing as of Dec 31, 2000.

But given the economic slowdown, several banks express concern about a possible jump in new and
re-entry non-performing loans later in the year.

CREDIT GROWTH

The risk of deteriorating asset quality as the recovery stalls has led many banks to forecast only slight growth in their loan books for 2001, particularly among the largest banks.

According to the Bank of Thailand, outstanding commercial bank credit totalled 4.7 trillion baht as of May, a fall of 9.4% from the year before.

At Bangkok Bank, executives project loan growth for the year of 2%, Thai Farmers Bank and Siam Commercial Bank 4% each and around 6% for Bank of Ayudhya.

Krung Thai Bank, on the other hand, expects to make 50 billion baht in new loans this year, with 30 billion in corporate lending and the rest split between small and medium-sized businesses and consumer loans.

The Finance Ministry in June also approved an expanded role for the state-owned Small Industry Credit Guarantee Corp.

Loans extended by state agencies such as the Industrial Finace Corp of Thailand , the Small Industry Finace Ciorp and Krunk Thai Bank can share credit risks with the SIGGC, a move aimed at boosting loans to small and medium-sized enterprises.