Slow recovery from a hangover

Big banks emerging stronger than ever but state institutions still struggling under weight of NPLs and minimal loan growth

Even as many local banks began to post a recovery in earnings and continue to clean up their balance sheets on the back of the economic recovery, overall returns for investors remained poor relative to the broad market.

Total shareholder returns (TSR) for the banking sector stood at -13.25% for 2002, well below the overall market rise of more than 17%.

In fact, the banking sector had the dubious distinction of being the sole sector on the SET that posted negative TSRs on one-, three-, five- and 10-year bases. Since the banking sector is the largest by far in terms of market capitalisation on the exchange, poor results due to the ongoing hangover from the 1997 crisis continue to weigh heavily on the broad index.

But for 2002, investors were well advised to take a selective approach because overall sector results were largely skewed by poor showings by Krung Thai Bank (KTB) and other state-owned institutions.

KTB, the largest stock in terms of market capitalisation on the exchange, posted a TSR for the year of -36.79%. Other underperformers included state-owned BankThai (BT), at -48.33%, Thai Military Bank (TMB) at -18.42%, the Industrial Finance Corp of Thailand (IFCT) at -15.13% and Thanachart Bank (NBANK) -33.33%.

On the other hand, leading Thai banks generally enjoyed a recovery in their share valuations, a reward for their generally more progressive management policies, conservative provisioning stances, stronger asset and earnings bases and larger franchises.

Leading the banking sector for 2002 was Siam Commercial Bank (SCB), with a TSR of 68.15%, followed by Thai Farmers Bank (TFB), at 39.78%, Bangkok Bank (BBL), at 35.62% and Bank of Ayudhya (BAY), at 21.70%.

Caught in the middle between the largest banks and the state-owned institutions were middle-sized institutions, including DBS Thai Danu (DTDB), with a one-year TSR of -3.85% and Bank of Asia (BOA) at -6.18%.

Many analysts say even as several banks begin to return to profitability and consider paying dividends, the overall earnings outlook remains gloomy. Loan growth remains moderate and competition stiff.

Underlying the overall improvement in profits for 2002 were declines in provisioning expenses. Non-performing loans continued to drop throughout the year on the back of the improved economy and low market interest rates. Loan growth also began to pick up in the fourth quarter of 2002, helping boost the bottom lines.

Poramet Tongbua, an analyst from Tisco Securities Plc, said the large banks had an advantage in terms of operating costs and customer bases.

But the outlook on future earnings of other banks is still unclear.

Therapong Vachirapong, an analyst at Merrill Lynch Phatra Securities, said banks that had the ability to control their operating costs would have a competitive edge in the future, given the prevailing shift of strategy to a more active role in the retail credit market.

Over the next few years, the redemption of hybrid-capital could create upside gains in BBL, TFB, TMB, BAY and DTDB stocks, which reduced their operating costs, he said. The issues of hybrid-capital in 1999 and 2000 were a popular alternative to recapitalisation without dilution. Little consolidation of the banking system since the economic crisis has also intensified competition.

``The largest banks dominated the structure of deposits and loans, giving them a competitive edge over the others,'' he said.

Pending regulatory changes, such as amendments to the Financial Institutions Act, would lead to a big change within the industry toward more universal banking. The abolition of blanket deposit guarantees would also significantly change the cost structure of weak and strong banks in the future.

Kavee Chutikasem, assistant manager for the research department of Capital Nomura Securities, said debt restructuring would be a decisive factor determining the banks' loan growth.

But the expansion of the bond market which resulted in a declining yield would affect borrowing from large corporations. He agreed that most banks would shift their earnings focus to the lucrative retail credit market and fee-based income.

Large banks were likely to be the biggest gainers, given to their large customer bases and better restructuring, while smaller banks, such as Bank of Asia and DBS Thai Danu Bank would benefit from investment in technology.

_Parista Yuthamanop

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