In 2005 sweeping regulatory changes provided both new opportunities and considerable threats for banking, finance, and insurance firms in Thailand. Successful institutions, especially smaller players, have reformulated and repositioned themselves in an increasingly competitive financial-services space.

As the financial sector continues to consolidate under the Financial Sector Master Plan, banking, finance, and insurance firms have become mired in an increasingly dynamic and highly competitive market. With interest rates rising, non-performing loans down to less than 10% of total loans, and the economy seemingly back on track, the fight for post-1997 survival is no longer the key issue. Although such optimism may be refuted by the current political environment, financial services players are clearly fighting it out in the strategic sphere, consolidating, diversifying services, rebranding, and aggressively seeking new avenues for growth.

How has this changing environment affected shareholder returns? Ten-year returns, spanning pre- and post-Asian crisis results, were negative for the entire banking sector, averaging -11.3%. However, the three- and five-year periods were much better for shareholders, with major banks' TSRs generally on par with, or exceeding the industry average of 25.7% and 19.8%, respectively.

Most recently the banking sector trailed the 20.2% return of the overall SET index over a one-year timeframe, generating an average TSR of 16%. However, five banks posted above average one-year TSRs for the sector: Kasikorn returned 35.8%, followed by Krung Thai, Bank of Ayudhya, BankThai, and Tisco Bank.

KBANK, Krung Thai, and Bank of Ayudhya aside, the other large banks, namely Bangkok Bank, Siam Commercial Bank, and TMB Bank, respectively generated 2.7%, 11.7%, and 14.4% one-year TSRs. While TMB may be benefiting from

merger-related growth, the wide range of one-year returns -- as well as the inclusion of small banks such as BankThai and Tisco Bank among the strongest performers -- show that the industry's competitive landscape is indeed changing.

As large banks increasingly embrace the Financial Sector Master Plan's proposed ``universal banking'' concept, they are further enhancing corporate and retail services, spreading out risk, and repositioning and strengthening their brands. After 1997, the dearth of new commercial lending led surviving banks to seek growth in retail segments.

This strategy has continued, with expanded offerings in personal loans, investment advisory, brokerage, insurance, and other retail-level financial services. In addition to this, as the volume of bad loans continues to decline and consumer credit demand tapers, banks are again looking to corporate borrowers, including shifting their focus to the financial needs of small to medium-sized enterprises (SMEs), a large and potentially profitable segment of the financial services industry.

Smaller banks, including Siam City Bank, United Overseas Bank (Bank of Asia and UOB Radanasin merger), BankThai, Tisco, Kiatnakin, Thanachart, and ACL Bank, chalked up one-year TSRs ranging from 20.1% to -19%. To a large extent, these figures reflect the tremendous reorganisation efforts taking place in these companies, several of whom are incarnations of former finance and securities firms.

BankThai emerged as the winner among smaller banks, posting a oneyear TSR of 23.1%, followed by Tisco Bank with 20.1%. Although confined to personal consumer and SME lending, such returns reflect both banks' evolution from wholesale to retail banking, increasing their scale and tapping new customer segments.

In comparison to the banking sector, the finance and securities sector per-formed poorly with an average negative 9.1% one-year TSR. Finance companies that have not upgraded to bank operators will falter, unless they merge with industry peers or upgrade to full-service or retail bank licences.

Poor returns may reflect the fact that their limited service offerings have been superseded by commercial banks. As an example of how this sector might progress, credit fonciers, whose core role was in providing home mortgage loans, have completely disappeared from the scene when they faced similar pressures to consolidate and upgrade.

While the finance and securities sector fared poorly, insurance providers did much better, posting a 34% average oneyear TSR, lead by Siam Commercial New York Life's impressive 229.2%. Targeting the fast-growing middle class, SCNYL sells policies through Siam Commercial Bank, its 47% Thai partner. The insurance sector is likely to continue its robust growth, thanks to a greater variety of offerings, greater co-operation with banks as sales outlets, and rising interest rates.

Though the full effects of regulatory and strategic shifts are still playing out, they provide a potential indication as to who might be the future winners and losers in the sector. It seems that winners are generally pursuing more integrated service offerings, especially at the consumer and SME levels, greater diversification, better risk management, and more customer-friendly branding. In the end, incumbent firms are becoming more integrated, innovative, and efficient, helping to bring greater stability to the overall financial services industry.