The dominators

The bigger they are the harder they fall _ and banks were no exception during the crisis. But now things are looking up

On size alone, the banking sector dominates the Stock Exchange of Thailand at nearly 30% of total market capitalisation. Institutional investors considering taking a position in Thailand inevitably must look to local banks, not just on account of size, but due to their general position as a proxy for the economy as a whole.

Over the course of the economic crisis, perhaps no sector has suffered more than banking. Accumulated losses remain in the hundreds of billions of baht, the cost of non-performing loans reached a peak of 47% of total loans. Shareholder returns over five-years has been -16.3%, ranked second worst in the market. Over three-years, the returns have been -22.2%, bottom of all sectors.

But over the past year, as the economy has improved, so have local banks. On a one-year basis to June, shareholder returns for the sector overall have gained 4.7%, skewed in large part by a poor showing by Krung Thai Bank, the largest firm in the SET with a market capitalisation of over 246 billion baht.

Three private banks _ Bangkok Bank, Siam Commercial Bank and Thai Farmers Bank _ all posted sharply higher returns at over 40% on a one-year basis, reflecting their position as market leaders in terms of strategy and positioning.

Bank of Ayudhya posted a 1% gain over one year, while both DBS Thai Danu and the Industrial Finance Corp of Thailand both saw negative returns of 3-4%. After that, returns fell sharply, with state-owned Krung Thai off -7%, Bank Thai and Thai Military down -10% and Bank of Asia down -19% on a one-year basis.

Still, compared with the three-year figures, performance overall has improved. Piyapan Tayanithi, senior vice-president at Bangkok Bank, says investor confidence overall in the sector has gained as provisioning burdens have fallen, profits recovered and lending growth rose.

Few question that stability for the sector has improved considerably compared with four years ago, he said. ``Gains have been driven by both improved fundamentals and improved sentiment,'' Dr Piyapan said. ``Improved financial performance, while not necessarily outstanding, has been steady enough to give investors a clear sign for the future.''

At Thai Farmers Bank, first vice-president Adit Laixuthai agreed that banks with a pro-active business strategy were the first to capture investors looking for long-term gains.

``TFB was the first bank to raise capital to cover losses from the sale of our distressed loans to our asset management companies. And we were the first bank to set aside provisions beyond regulatory minimums,'' Dr Adit said.

The bank has also aggressively moved to introduce principles of good corporate governance throughout its operations, including a recent announcement earlier this year that it would set aside additional general provisions to cope with potential future risks.

Poramet Tongbua, an analyst at Tisco Securities, said the larger private banks were outperforming their peers through clear provisioning strategies, improved profitability over the past one to two years and overall gains in efficiency and productivity. The largest banks, such as BBL, TFB and SCB, were best positioned to benefit from economic recovery due to their extensive network.

For state banks, share price performance stands to benefit once both Krung Thai and BankThai complete new public offerings, raising their free floats and reducing the holdings of the government.

A capital restructuring plan for Krung Thai prior to its offering will clear over 77 billion baht in accumulated losses off the books as well as eliminate the overhang of 10.8 billion warrants now held by the Financial Institutions Development Fund.

For BankThai, plans call for 707 million shares held by the FIDF to be offered to private investors, reducing state holdings to 49%. Proceeds will be used to clear some 800 million baht in accumulated losses at the bank, allowing resumption of dividend payments next year, according to Prasert Wangrattanapranee, BankThai executive vice-president.

``We've seen steady gains in profits for the past six quarters,'' he said, adding that BankThai would be the first bank to resume dividend payments since the 1997 crisis.

But other banks were unlikely to be able to pay dividends until 2005-2006, said Mr Poramet. For the larger banks, any dividend payment will likely have to wait until they redeem their outstanding capital securities, or else face huge increases in funding costs. _Darana Chudasri

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