BANKING

Shaping up for the future

As industry liberalisation gains momentum, financial institutions are beefing up their capital bases to brace for intensifying competition and meet tougher accounting standards

by DARANA CHUDASRI

Market consolidation and regulatory reforms were the main themesforThaibankingin2006.

While profits fellfrom2005’sbanner performance levels, steady loan growth and modest improvements in interest margins helped local banks improve their capital base to cope with stiffer rules imposed by the Bank of Thailand.

Regulatory reform played a large role in 2006, as the central bank signalled that it planned to move forward with market liberalisation and reforms outlined in the financial master plan adopted two years ago.

This includes allowing banks to offer a full array of universal banking services and introducing a limited deposit insurance programme. It also covers accounting changes aimed at forcing banks to clean up balance sheets and prepare for the adoption of the Basel II capital accord.

The banking sector started the year with 16 Thai commercial banks in operation, including newcomers Tisco Bank, ACL Bank, Kiatnakin Bank and Thanachart Bank — four institutions that were upgraded to finance companies under the master plan.

Two new retail banks—GE Money Retail Bank and Land and Houses Retail Bank — also ramped up their public presence, albeit in the niche segments of consumer finance and housing.

Two mid-sized banks, meanwhile, moved forward with partnership deals with international powerhouses. GE Capital, the financial arm of US conglomerate General Electric, has initiated the acquisition of a quarter-stake of Bank of Ayudhya. The deal is expected to close in early 2007.

Bank Thai also hopes to sell off a minor shareholding to TPG Newbridge, the Asian investment arm of the private equity firm Texas Pacific Group.

BAY in August signed an agreement to offer GE Capital 1.391 billion new shares at 16 baht per share, equal to a 25.4% stake on a fully diluted basis.

The 22-billion-baht deal was stalled after the Sept 19 coup, but is now expected to be completed in January 2007.

GE Money Retail Bank, which started operations on Jan 6, 2006, will be forced to return its bank licence under the central bank’s single-presence policy.

Assets and liabilities will be transferred to BAY, including deposits, mortgage and home equity loan assets. GE Money will continue operations in the consumer finance segment, offering installment loans, personal loans, bank cards and hire-purchase and mortgage services.

Leading shareholder Krit Ratanarak, who also controls television Channel 7 and has a substantial shareholding in Siam City Cement, said the GE deal was necessary to help BAY expand to a full universal bank and survive stiffer competition.

The Bank Thai transaction involves the private placement of up to 731.45 million new shares to TPG Newbridge and co-investors at a price yet to be determined. The share issue, expected to be completed in February, will dilute shareholdings of the Financial Institutions Development Fund, currently the largest Bank Thai shareholder at 49%, to about 33%, equal with that of Newbridge. Once the transactions are complete, Bank Thai and BAY will join TMB Bank, UOB and Standard Chartered as commercial banks boasting a single foreign financial institution as a major shareholder.

Other banks, including Thanachart, Siam City and others, are also reportedly considering investment offers, although no additional deals have yet been announced.

Consumer Banking
Thai banks in 2006 continued the process started several years ago of refining consumer products, brand images and back-office operations.

On the funding side, many banks launched short-term debentures, bills of exchange or hybrid bonds to help shift depositors toward longer-term instruments.

Moving depositors out of savings or fixed deposits and into fixed income instruments also helped banks reduce fees paid to the Financial Institutions Development Fund.

The imminent launch of the new deposit insurance agency also led banks to take steps to restructure their deposit base. The new agency will replace the blanket guarantee on deposits with a limited guarantee programme with premium rates set based on the financial standing of each financial institution.

In the credit-card segment, local issuers in late 2006 received approval to charge a maximum interest rate of 20% per year from 18%. At the same time, minimum monthly payments were raised to 10% of the outstanding balance, compared with5%previously.

Retail banking in 2006 remained highly competitive, particularly among the largest banks. Krung Thai Bank announced plans to increase its presence in the teenage and student markets with an innovative tie-up with local music labels to offer music downloads for Internet banking customers.

Kasikorn bank, meanwhile, continued to build its universal ‘‘K’’ image and promoted its securities, asset management and leasing services to complete its strategy as a full-service, universal bank. Siam Commercial Bank also is expected to become even more aggressive in the retail market in 2007 under the leadership of new president Kannikar Chalitaporn, a long-time marketing expert who has overseen the revival of SCB’s retail services over the past several years.

Regulatory changes
Local banks will face two major regulatory changes in 2007 — the introduction of the new IAS39 accounting standards and the rollout of the Basel II capital framework.

IAS39 will have a profound impact on how banks calculate loan reserves by forcing banks to consider collateral values based on actual economic value.

The net effect will be to force banks with lower reserve levels to possibly increase their provisions and reduce profits in 2007, although the largest Thai banks are unlikely to be significantly affected as reserve levels are already above minimum regulatory requirements.

The central bank plans to phase in the rule starting at the end of 2006 with full implementation in 2007.

Basel II, meanwhile, will set new reserve requirements for different asset classes, potentially leading banks to shift lending priorities to lower-risk segments such as home mortgages at the expense of higher risk categories such as small business loans. Under Basel II, banks will also have to set aside capital to cover market and operations risks, as well as credit risks.

This will force institutions to improve internal controls and portfolio management systems.

Analysts, however, agree that 2007 should see banks continue to perform well, thanks to greater political and macroeconomic stability and the trend towards a decline in interest rates starting in the first half. Loan growth is projected at 8% to 10% in 2007, or double the rate of economic growth and on par with loan growth this year.