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Arresting the decline

In the absence of dividends in years ahead, investors are looking for capital gains

Even while bank profitability has recovered some ground over the past year, few expect a rapid return to the boom years, when Thai banks dominated the market.

The economic crisis has ravaged bank balance sheets, as bad loans have eaten into interest earnings and capital reserves. With accumulated losses still in the billions of baht for many institutions, it could be years before dividends can be paid to investors.

Still, investors in the Thai market can little afford to ignore the banking sector which, in capitalisation, still accounts for nearly a quarter of the market and consistently ranks among the most active sectors in turnover.

Shareholder returns over the past few years have been on a roller-coaster. According to the L.E.K. Consulting/Bangkok Post Shareholder Scorecard, sector returns over five years have stood at -34.4%, compared with -24.8% for the market overall.

The three-year results, coming after the float of the baht and near the nadir of the stock market's decline, give slightly more cause for optimism, with the banking sector offering total shareholder returns of 9% compared with a market return of 6.8%.

For the most part, nearly all of the banks have produced similarly poor returns, owing to the economic downturn. Still, some key distinctions can be drawn among the stocks.

Take Bank of Asia. On a one-year basis, shareholder returns have dived 34.8%, the worst in the group and well off the -10.6% sector average.

President Chulakorn Singhakowin said market sentiment over the past year had hurt share prices, owing to persistent uncertainties about the long-term commitment of ABN Amro to maintaining its majority stake.

Despite consistent reassurances that ABN Amro was committed to the BOA, the rumours had taken a toll, he said.

"Frankly, the share prices aren't fairly reflecting our performance," Mr Chulakorn said, and urged investors to look at performance and management strategy as a guide instead.

Indeed, on a five-year basis, BoA posted the second-lowest loss for shareholders, at -29.7% compared with a sector return of -34.4%.

On the other side of the spectrum, market leader Bangkok Bank well outstripped its peers, returning a one-year total shareholder return of 24.6%, well ahead of second-ranked Thai Military Bank, at 4.8%.

Shares of Bangkok Bank have gained strongly since the Thaksin government took office, as the country's largest bank was projected to be a big winner from the establishment of the Thai Asset Management Corp, a state-owned agency set up to take over bad loans from private and state banks. Piyapan Tayanithi, the senior vice-president of Bangkok Bank, said the clear improvement in stability of the sector compared with three years ago had also helped draw investors.

Capital calls over the course of the crisis had hurt shareholder returns for many institutions, Bangkok Bank included, he said.

At Thai Farmers Bank, which posted the lowest five-year decline in shareholder returns for the sector, executives credited forward vision in terms of internal restructuring and business focus as helping lay the path for a future rebound in shareholder returns.

While short-term prospects for investors remained hobbled by the sluggish economy, TFB was among one of the best prepared institutions for the future, according to Adit Laixuthai, the first vice-president.

"I think TFB is now entering a new stage. We've completed our internal reforms, and are ready to fight in the market," he said.

In any case, bank executives and analysts agree that prospects over the medium term for shareholders are for gradual improvement, rather than sharp gains.

"Things have certainly improved from two to three years ago. But for investors, next year is unlikely to be much different from this year, given that some time is still needed for adjustment," said Chartsiri Sophonpanich, president of Bangkok Bank.

Mr Piyapan agreed, saying that investment returns for the banking sector would likely mirror the performance of the overall economy. Any breakthrough would have to wait until investor confidence fully returned that the worst was over, he said.

But with annual economic growth projected to range between a modest 3% and 4% over the next few years, clearing the accumulated losses from the balance sheet and returning to pay dividends remain far away.

Kavee Chukitkasem, an analyst with Capital Nomura Securities, said it was unlikely that any bank would be able to pay dividends over the next four to five years.

As a result, investors in banking stocks were looking for capital gains. But with trading ranges expected to stay limited for now, investors had to take a selective approach to limit their downside risks.

- Darana Chudasri