Moody's warns of banking sector risks

Moody's warns of banking sector risks

Outlook still stable, but investment weak

Thai banks still face a variety of risks, including high household debt, economic growth with high exposure to external demand and rising restructured loans, says Moody's Investors Service.

"Thai banks are still facing many downside risks looking forward, including growth that is not structural, high household leverage and low private investment," said Alka Anbarasu, a Moody's vice-president and senior analyst.

She said Thai household debt has already stabilised but remains at a high level, which could dent loan growth.

Private investment, which has not gained traction with close to zero growth recorded last year, lends little support to the banking sector's credit growth.

"We estimate credit will grow 4-5% system-wide in 2017, moderately faster than the 3.2% in 2016," Ms Anbarasu said.

She said credit growth is not expected to vary much from this level in the near future, given that the current economic growth pace is far below the pre-2010 level.

"Higher restructured loans is also a key downside risk to Thai banks' asset quality," Ms Anbarasu said.

Restructured loans that are not classified as non-performing loans (NPLs) at commercial banks rated by Moody's increased to about 3.5% of gross loans in 2016 from 2.9% in 2015.

She said the increase in restructured loans were mainly from small and medium-sized enterprises (SMEs).

SME loans, which make up the biggest proportion of Thai banks' exposure, still face downside risks, as there are still NPLs from that segment.

The reason behind the deterioration in SME loans is that those companies have not adjusted to the new reality of slower economic growth, Ms Anbarasu said.

"As NPLs are a laggard indicator, we could still see deterioration in terms of credit quality with the underlying factors becoming stable," she said. "The underlying factors [of rising NPLs] have already stabilised, so NPLs could peak in the coming period."

Her comment echoed the Bank of Thailand's recent estimate that the delinquency rate of bad loans would peak in the fourth quarter as a broader-based economic recovery and robust export growth take hold.

Ms Anbarasu said that despite the recent default of one listed company, Moody's believes that broad corporate asset quality remains stable.

"The default of one Thai corporate recently did affect some banks, but not the system as a whole," she said.

Moody's outlook for the Thai banking system over the next 12-18 months is stable.

"Despite a number of downside risks, the stable outlook implies that we see the upside and downside risks being equal," Ms Anbarasu said.

The stable outlook is based on Moody's assessment of five drivers: operating environment (stable); asset quality and capital (stable/improving); funding and liquidity (stable); profitability and efficiency (stable); and government support (stable).

In related news, Christian de Guzman, a Moody's vice-president and senior credit officer, said political risk has been easing in Thailand but is still at a high level compared with its peers in the region. Moody's lowered the political risk score for Thailand to moderate from moderate+.

He said Thailand continues to face elevated political risks with a moderate political risk score, higher than all of its peers such as Malaysia (low-), Indonesia (low), Vietnam (low) and Cambodia (moderate-).

Regarding other measures, Thailand's fiscal strength remains intact while the country still faces risks to long-term sustainable growth, Mr de Guzman said.

Moody's reaffirmed the Baa1 stable outlook for Thailand in July.

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