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Bad loans are down but remain at levels high enough to cloud economic recovery

 

BANKING

Slowly passing the crucial test

DARANA CHUDASRI

The past year continued to test the banking sector, both in asset recovery and organisational changes for the future.

Non-performing loans, according to the Bank of Thailand, slid to around 1.05 trillion baht, or 22.04% of total loans, by October, a sharp drop from 47% the year before.

However, if counting loans transferred to asset management companies, bad loans stood at around 31% of the total, leading to continued depressed margins and a cautious approach to new lending.

All local banks were expected to meet the full provisioning deadline set by regulators for the end of 2000.

Thai Military Bank was able to raise 29.8 billion baht earlier this year, with 3.05 billion coming from a rights issue, 6.9 billion baht from a private placement to new shareholders and 19.9 billion from the sale of preferred shares to the Finance Ministry under the August 1998 financial recapitalisation programme.

The new capital helped bring Thai Military Bank's tier-one capital adequacy ratio up to around 17%. The capital increase saw four new groups each take a 3% stake: National Finance, Thai Life Insurance, whisky tycoon Charoen Siriwattanabhakdi and Thai Rak Thai leader Thaksin Shinawatra.

Sweeping organisational changes saw the armed forces substantially reduce their representation on the bankûs board, replaced by appointees from the Finance Ministry and other new shareholders. Somchai Sakulsurarat, former president of Bangkok Metropolitan Bank, was named the new head of Thai Military Bank, replacing Thanong Bidaya.

DBS Thai Danu Bank, meanwhile, raised 13.5 billion baht in new capital in June, 11 billion from a rights issue and the rest in a private placement to its parent, the Development Bank of Singapore. The Bank of Asia, in October, announced plans to issue 776.5 million shares in a 1:4 rights issue at 6.5 baht each.

Other banks, including Bangkok Bank and Bank of Ayudhya, made various arrangements to raise new capital as well, but have so far delayed any action due to poor market sentiment.

Many banks, after making full provisions against their bad loans, began the process of writing off the worst of their assets from their balance sheet.

In the first half, the top five banks - Bangkok Bank, Thai Farmers, Siam Commercial Bank, Bank of Ayudhya and Thai Military - wrote off more than 250 billion baht in bad loans from their accounts.

Overall figures improved sharply in the third quarter after state giant Krung Thai began the transfer of 537 billion baht in bad loans to Sukhumvit Asset Management Co, a firm wholly owned by the Financial Institutions Development Fund.

The development fund will select four or five financial institutions in early 2001 to manage the loan portfolio under set contracts. Overall, loans to some 8,990 customers were transferred, comprised of 232 billion baht in loans formerly from First Bangkok City Bank and the rest representing bad loans at Krung Thai.

At Krung Thai, non-performing loan levels after the transfer stood at around 16.5% of total loans. By October, debt restructuring had helped bring this down to just 10.9% of total assets.

Another state bank, BankThai, finalised its own agreements with regulators on restructuring its accounts in September. The agreements will compensate BankThai for losses incurred from the bad loans over a five-year period.

The transfer of bad loans to an asset pool brought BankThai's non-performing loans down to 7.5% of total assets, with a tier-one capital ratio of 16.78%, well above regulatory minimums.

Meanwhile, negotiations to sell a 75% stake in Bangkok Metropolitan Bank to HSBC dragged throughout the fourth quarter, largely due to legal technicalities.

Bank regulators announced that Siam City Bank, which saw its own sales efforts to Newbridge Capital collapse earlier in the year, would be reauctioned.

In December, two bidders, one led by Tisco Finance and the other a consortium led by Charn Issara, Newbridge and Global Thai, a subsidiary of Lehman Brothers, emerged as leading the second auction for Siam City.

Nearly every single bank also moved forward in transferring the worst of their loans to separate asset management companies. Siam Commercial Bank will transfer a total of around 30 billion baht worth in assets to its subsidiaries, while selling land worth five billion baht.

Thai Military Bank plans transfers of around 20 billion baht to its own asset management firm, resulting in non-performing loans falling from 27% of total loans at the end of September to around 18%, or 60 billion baht, by the end of the year.

One notable exception to AMC transfers has been DBS Thai Danu, which announced in September it would sell 30.6 billion baht in bad loans, 77% of its total non-performing loans, for a price of 8.4 billion, or 29% of the principal.

Some 22 billion baht of the loans were purchased by National Finance, with the rest taken by Global Thai Property Fund, a unit of Lehman Brothers.

The transaction helped make DBS Thai Danu one of the cleanest banks in the system, with non-performing loans cut from 34% of total loans to just 10%, or six billion baht, but the sharp discount achieved under the sale raised concerns among analysts that significantly higher losses could be expected at local banks, due to lower recovery values, depressed market asset prices and the slow economic recovery.

While raising new capital and debt restructuring remained top priorities for local banks over the past year, internal reforms also made significant progress as institutions took steps to slash costs and prepare for stiffer competition in the future.

Many banks announced new centralised credit hubs, where approvals and analysis would be split from marketing done primarily at the branches.

Regional hubs also promised to increase cost savings for local banks in consolidating back-office functions. Branch offices at several banks, notably Bangkok Bank, DBS Thai Danu and Thai Military, were modernised to broaden their appeal to retail customers.

For 2001, most banks say they will continue to focus resources on consumer lending, such as in high-margin credit cards, personal credit or home loans.

Internet banking, mobile banking and electronic banking also continued to make inroads in the market, led particularly by Thai Farmers Bank and Bank of Asia.

Still, while analysts expect banks to continue to make progress in 2001 on restructuring both their work processes and financial position, most agree that the position of local banks will remain a worry for the overall economy.

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