Thai banks' profitability challenge

Thai banks' profitability challenge

Factors include economic headwinds, a maturing market and elusive payoffs on digital investments

The study predicts various headwinds in the Thai banking market will put profitability metrics under duress.
The study predicts various headwinds in the Thai banking market will put profitability metrics under duress.

Banks in Thailand are facing a deteriorating market structure, marked by intensifying competition, commoditisation of services, shrinking of some fee revenues, and a potential rise in non-performing loans (NPL), according to a new study by the management consultancy Roland Berger.

In the next five years, the study predicts, various headwinds in the Thai banking market will put profitability metrics under duress.

"In the coming years, banks are less at risk of losing out to new digital disruptors and entrants than they are of eroding revenues and profit due to insufficient adjustments in their operational model and cost structure," says Dr Udomkiat Bunworasate, a partner at Roland Berger and co-author of the study.

"Declining profitability will likely influence senior management's decision to undertake further cost structure adjustment in the banking sector." Thai commercial banks, the study says, will be hard-pressed to preserve the current average return on equity (RoE) of 8% as in previous years. Profitability of the entire sector is at risk of dropping to an average RoE of 6.6% over the next three years.

As the sector transitions to a more mature market stage, common problems include margin compression, slower annual revenue growth, as well as increases in personnel, regulatory and compliance costs.

Amid a weak macroeconomic outlook, ongoing digitisation of banks' business models can no longer deliver the necessary revenue increase or cost reduction to compensate for revenue erosion and margin compression.

Dr Udomkiat advises banks to rely on proven short-term cost containment initiatives to weather the next 3-5 years while they reassess their digital investments.

Ultimately, the study estimates between 100-180 billion baht in cost savings will be needed in the next five years to fight RoE erosion.

It also draws a parallel to mature economies to explain the risk of bloated cost structures in a new environment of slower growth and changing consumer preferences.


For most of the past two decades, the Thai economy has enjoyed a steady recovery from 1997 Asian financial crisis. Commercial banks enjoyed high asset growth averaging 8% per year up until 2013.

However, sector growth slowed to 3.7% a year on average between 2013 and 2019, coinciding with the launch of transformation programmes to sustain top-line growth and increase efficiency. There has been an explosion in digital initiatives such as robo-advisory services, customer service chatbots, revamped mobile banking experiences, cloud adoption and online credit assessment for lending.

The combination of these digital programmes has put a significant investment burden on banks that is estimated to last several years before projected dividends materialise.

"In practice, adjustments to cost structures are needed in the short term as banks are in the middle of a difficult journey," said Philippe Chassat, senior partner at Roland Berger and a co-author of the study.

"This momentum can be amended but should not be stopped entirely. Banks still have to go through what we call the 'Valley of No Return' until the digital dividend pays off. This will most likely be a longer than expected walk."

To prevent deteriorating profitability, Roland Berger estimates Thai banks need to produce 100 billion baht in cost savings from now until 2024 for late-stage benefits from digital transformation to materialise.

Dr Udomkiat warns that digital dividends may yet remain elusive, which would necessitate a deeper reduction in the cost base -- up to 180 billion baht -- to maintain current profitability levels.


Roland Berger recommends banks' management face the cost structure challenge head-on and suggest three complementary and well-proven approaches.

The first method, accelerated zero-based budgeting, deconstructs existing activities and ways of working, and systematically challenges the necessity of each line item. The programme historically brings an average of 12% to 15% in net cost savings.

The second approach stresses procurement excellence best practices in organisational spending categories, cost structure, as well as tools and processes. This traditionally yields anywhere between 8% to 12% in savings, with mature companies producing more savings if drastic changes in organisational practices are introduced.

A third approach, frugal IT, encourages banks to challenge the value of every IT and digital investment item with a very granular view. In assessing trade-offs and possible gains, banks have historically enjoyed savings of 10% to 20% as a result.

In any case, Mr Chassat said, a lot of work will be needed for banks to transition to the new structural realities of the market. Proven cost containment measures can help bolster profitability and provide leeway for necessary strategic investments.

Banks should take proactive steps now to be in a better position to benefit from the next economic uptick and enjoy the positive mid- to long-term regional growth prospects for the sector under these new conditions.

To download the study, visit

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