A cosy club no longer

Darana Chudasri

No sector has been harder hit or undergone greater changes over the past five years than the financial world. Throughout the mid-90s, the economic boom was fuelled by easy money from Thailand's 15 commercial banks, over 90 finance companies and scores of foreign bank branches and international banking facilities.

BANKING Five years of upheaval have resulted in a financial sector with fewer players but a much better focus on smarter ways to expand and tap clearly defined market niches

In 1994, regulators eased several restrictions on the sector as part of an ambitious plan to position Bangkok as a regional financial hub in direct competition with Hong Kong and Singapore.

Thai banks, majority controlled by some of the country's most prominent business families, enjoyed some of the highest profit margins in the world given their protected status and the booming economy.

But the float of the baht in July 1997 and the subsequent economic collapse made all of these ambitions appear mere hubris.

Soaring bad loans and falling capital funds led authorities to order the seizure and eventual closure of dozens of finance companies and a handful of banks.

Bangkok Bank of Commerce was ordered closed and liquidated, while First Bangkok City Bank was merged with Krung Thai Bank. Union Bank was merged with seven finance companies and transformed into BankThai, while Laem Thong Bank was taken over and transformed into Radanasin Bank, eventually to be sold to Singapore's United Overseas Bank.

Nakornthon Bank was seized by regulators and sold to Standard Chartered. Two other banks, Bank of Asia and Thai Danu Bank, independently agreed to be taken over by foreign banks, ABN Amro and Development Bank of Singapore.

Siam City Bank and Bangkok Metropolitan Bank were both taken over in 1998. Despite various attempts to sell the two institutions to foreign investors, regulators earlier this year announced that the two would be merged together and shelved privatisation plans indefinitely.

SURVIVAL OF THE FITTEST?

Bangkok Bank introduced Bualuang iBanking as a new tool for customers, at a fair in May.

From 15 banks pre-crisis, Thailand's commercial banking sector now totals 12. Yet no bank has emerged unscathed. Whether in shareholding structure, operating procedures, investment policies and product and branch designs, the extent of change has been enormous, as institutions have looked to refocus on customers, improve efficiency and eliminate waste.

Today's sector roughly divides into three groups. Largest in assets are the Thai-owned banks: Bangkok Bank, Thai Farmers Bank and Bank of Ayudhya. Two other institutions, Siam Commercial Bank and Thai Military Bank, were able to raise capital and remain in Thai ownership only by accepting assistance from the Finance Ministry under a 1998 state recapitalisation programme.

The second group consists of state-owned banks, including giant Krung Thai Bank, Siam City Bank and BankThai. Plans call for all three to eventually be privatised, starting with BankThai and Krung Thai later this year.

The third group, smallest in size but among the most aggressive in initiative and new product design, are the hybrid banks majority controlled by foreign institutions: Bank of Asia, DBS Thai Danu, Standard Chartered Nakornthon and UOB Radanasin.

BEHIND THE SCENES

Shareholding changes have come directly from the need for local banks during the crisis to have raised hundreds of billions of baht in capital to cover loan losses.

Non-performing loans in the banking sector reached a peak of 47% of total outstanding loans in May 1999, compared with around 10% now.

Local banks, which had a loan-to-deposit ratio of nearly 110% in 1997, saw this fall to under 80% this year as banks tightened lending criteria and wrote off or transferred to asset management firms dud loans.

Therapong Vachirapong, a banking analyst at Merrill Lynch Phatra Securities, said a greater awareness for credit risk was a natural position for local banks to adopt through the crisis.

"Before, banks would take every baht in deposits they could get and lend it out," he said.

"But once the non-performing loans started rising, everyone had to look to find ways to reduce their credit risks and seek alternative investment options."
Bonds and money market instruments have been one popular avenue for banks seeking ways to maximise returns on excess liquidity. With the need for greater sophistication in managing asset portfolios has also come the recognition for the need to improve risk management to overcome potential maturity or interest rate mismatches.

Tighter interest rate spreads, the result of higher competition and the ongoing costs of non-performing loans, has also encouraged banks to seek ways of raising fee-based income.

While gross spreads between lending and deposit rates remain around five to six percentage points, net spreads stand at just around one to two points, insufficient to help clear the huge accumulated losses which remain on the balance sheets of nearly every institution.

Hence the drive to increase fee and investment income. According to the Bank of Thailand, fee income totalled 32.6 billion baht for the banking sector in 1997, compared with 34 billion last year and 9.5 billion in the first quarter alone.

Sub-branches with automated services are a new trend for banks seeking to control cost. An example is the Bank of Ayudhya outlet opened at Assumption University. Rev Bro Prathip M. Komolmas (fifth from right), the university president Jamlong Atikul (fourth from right) took part in the ceremony.

Revenue based on personal finance products and leveraging new technologies such as ATM and other electronic banking services have jumped sharply, from 2.17 billion baht in 1997 to around 4.3 billion last year and 1.2 billion in the first quarter.

Another clear change in recent years has been the overall market positions of the banks themselves. In the past year in particular, state-owned commercial banks and more specialised institutions such as the Government Savings Bank and Government Housing Bank have been aggressively raising their lending profile, to the point where they now all but match that of privately-owned banks in outstanding credit.

For the most progressive banks, such as Bangkok Bank, Thai Farmers and Siam Commercial Bank, focusing on core competencies and divesting unnecessary businesses has been a priority. Outsourcing of non-core operations such as human resource management and information technology has become more common.

Nearly every private bank has already undergone numerous waves of early retirement programmes and branch closures or downsizing in an effort to refocus on profits and efficiency.

Delivery channels have changed as well. Branches are increasingly used as a contact point to promote retail products, while operations such as credit approvals and small business and corporate lending are centralised at the head office or with regional hubs. Call centres and Internet web sites are increasingly promoted together with e-banking products as a means of reducing customer reliance on personal attention at the branch.

Micro-branches relying on ATMs and passbook update machines are increasingly common at high-traffic locations such as shopping malls and universities to handle routine deposit withdrawals and account services.

NEW CUSTOMER FOCUS

While bank shareholders and staff have had to shoulder considerable losses and pressure over the past five years, one clear winner emerging from the crisis has been the customer.

With the top companies increasingly turning to the bond markets for financing and small and medium-sized firms still a considerable risk for many loan officers, banks have looked to retail banking as their main revenue driver.

An increased customer orientation means more products tailored to specific needs, greater convenience through new technology and lower fees and costs as a result of higher competition.

In the housing market, interest rates have fallen to as low as a fixed rate of 3.5% for new mortgages, as banks look to build up their customer rolls and hopefully cross-sell other services, whether it be credit cards, personal loans, insurance or asset management products.

Co-branded cards are increasingly popular. Bank of Asia president Chulkorn Singhakowin (left), and Major Cineplex president Vicha Poolvaraluk introduced ASIAMajor Experience Visa Electron debit cards.

A more demanding consumer has also led to various regulatory moves for banks to simplify contract terms and even formally limit interest spreads between lending and deposit rates to close the gap between retail and corporate customers.

Deregulation in the credit card market has removed minimum income requirements, opening the way for millions of new applicants.

At the same time, however, banks are also looking to better use the billions of baht spent in technology upgrades by forcing low-value transactions away from the branch counter to ATM networks and eventually the Internet, mobile banking and other electronic services.

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