Thailand's banking sector has been disrupted yet again, but this time it's not a sophisticated new technology creating turbulence. Rather, it's a microscopic virus that induces fear of immense collateral damage that could shake the country's financial pillars to its core.
Despite having no locally transmitted infection for more than a month in Thailand, the coronavirus impact persists, shattering hopes for a rapid economic recovery as businesses and consumers cope with reduced revenue and falling income.
The latest economic forecast by the Bank of Thailand, anticipating a full-year 8.1% GDP contraction, suggests that the worst is yet to come.
As employers across the business spectrum have adopted cost-cutting measures, such as imposing mandatory leave-without-pay policies and job cuts, it's inevitable that debt-servicing ability will deteriorate among consumers and small businesses.
Recognised as an institution positioned in an ivory tower with a wide-ranging regulatory vision, the Bank of Thailand has implemented a series of pre-emptive measures to guard against a hard-landing economic scenario.
In the latest effort, commercial banks have been ordered to freeze interim dividend payments to shareholders and suspend stock buybacks to preserve capital. Similar restrictions on bank dividend payments have been announced in Australia, the euro zone, India, Vietnam and Britain.
The move by the Bank of Thailand coincides with a directive to cut interest rates on credit cards, personal loans and other forms of credit to help millions of people facing financial stress.
The maximum interest rate for credit cards will fall to 16% (from 18%), while the rates for personal loans will be reduced to 24-25% (from 28%), effective Aug 1.
The new rates for revolving loans and instalment loans will be 25%, and auto title loans will carry a maximum rate of 24%.
Although the domestic banking industry has learned its lesson from the 1997 Asian financial crisis and retains strong capital buffers against loan delinquency, the unfolding predicament of the pandemic is still stoking fears of a recipe for another financial meltdown, with non-performing loans (NPLs) poised to edge up.
The non-performing loan ratio of commercial banks stood at 3.05% of total loans at the end of March. Pornprom Satrabhaya
THROWING A LIFELINE
Suspending interim dividend payment and stock buybacks will support banks' liquidity and capital base. Under normal practice, bumping up capitalisation is done to boost Tier 1 capital, while bond issuance is used to increase Tier 2 capital.
"We need to keep our guard up to prepare for uncertainties," said Ronadol Numnonda, deputy governor for financial institution stability. "The central bank will not sit idly by and let the situation deteriorate to the point where it needs to raise capital. With the measures, the NPL ratio should not jump to 50% as happened during the 1997 financial crisis."
The central bank requires banks to maintain a minimum CAR of 8.5%. According to central bank data, commercial banks' total CAR stood at 18.7% at the end of March and the NPL ratio was 3.05%.
The ghosts of the 1997 financial meltdown still haunt Thailand to this day. Capital liberalisation through lax supervision of the banking industry, imprudent lending and excessive hot-money inflows culminated in a crisis to the point that the country's foreign reserves were almost depleted as they were used to defend a massive currency speculation.
Unlike 23 years ago, when bad loans peaked at 50%, the NPL ratio of commercial banks was 3.05% of total lending at the end of March.
But as businesses, especially those operating in the export and tourism sectors, begin to falter due to travel restrictions and weak demand, it's a given that loan delinquency will rise going forward.
Aphinant Klewpatinond, chief executive of Kiatnakin Bank, said NPL spikes are expected in the industry after many jobs were shed and a large number of business shuttered due to the pandemic.
Banks need to throw debtors a lifeline because their repayment ability has been eroded by the virus situation, not because of weakening financial discipline, he said.
Against the backdrop of the faltering economy, some banks could omit interim dividend payments or avoid share buybacks to maintain liquidity and the capital base, even in the event that the central bank does not order them to do so, Mr Aphinant said.
"The key concern of the central bank is uncertainties, so the regulator has implemented pre-emptive measures," he said. "With solid capital buffers, banks would have sufficient resources to help outbreak-hit customers get through the crisis and support the economic recovery after the outbreak has ended."
Mr Aphinant said the central bank's measures to lower the ceiling rates for consumer loan products will increase the credit risk of some borrowers, and banks in turn will tighten loan approval, resulting in more difficulty for some customers to access lending and drive some of them to loan sharks.
Pisit Puapan, director of the Bureau of Macroeconomic Policy at the Fiscal Policy Office, applauded the central bank's instruction that bars commercial banks from paying interim dividends on this year's earnings and buying back their shares, saying that it helps shield banks because no one knows how long the pandemic will last.
The measure will build up confidence that local banks' capital buffers will remain solid, Mr Pisit said.
This year's worst contraction for the Thai economy is expected in the second quarter, he said, and GDP will gradually recover on the back of the government's domestic tourism stimulus measures, which will partly offset lost tourism receipts from foreigners.
A customer looks at SCB ads for personal and SME loans at a money expo. Patipat Janthong
UNDERWEIGHT OUTLOOK
Although the central bank's moves are seen as an additional buffer against impending adversity, they are a double-edged sword because banks are expected to further tighten loan approval amid falling profit margins and rising bad loans.
"[The central bank's measures] have disappointed investors who expect interim dividends and raise concerns about rising NPLs in the future, especially personal retail loans, which make up 39% of total loans and comprise mainly housing loans," said Therdsak Taveeteeratham, executive vice-president of Asia Plus Securities (ASP).
"Meanwhile, as a result of companies' cost reduction policies (wage curbs), the unemployment rate is increasing while household income is declining," he said. "So Thailand is suffering from an income shock."
Loans worth 6.6 trillion baht have been registered in the loan payment programme, including retail loans (57%), SME loans (32%) and corporate loans (11%).
Retail loans are expected to recover weakly during a period of falling income and deteriorating debt-servicing ability.
"We reiterate an underweight outlook for the banking sector," Mr Therdsak said. "The economy is decelerating, while bank plays are less favourable due to lower 2020 dividend yields."
Nevertheless, the capital adequacy ratio of commercial banks is still strong. For instance, the Tier 1 ratio of commercial banks averages 16%, much higher than the minimum criteria of 9.5%.
Banks will be able to support higher NPLs than the current average by approximately four times, which will cause capital to decrease.
But banks' earnings for the remainder of the year are still pressured by many factors, including weakening net interest margin and debt quality that may worsen, according to Trinity Securities.
The aid measures for debtors, namely loan-rate ceiling cuts and a three-month loan payment holiday for both interest and principal and minimum instalments, will also affect leasing companies' business operations.
Aeon Thana Sinsap Thailand Plc would be most affected by a cut in credit card loan rate (39% of loans) from 20% and cash withdrawal card loan rate (50% of loans) from 26%, according to ASP.
Srisawad Corporation Plc and Muangthai Capital Plc would be less affected because their lending rates of 22% are lower than the new ceiling of 24%.
Leasing companies' asset quality has to be monitored closely, as debtors' ability to pay debt will be depressed by the economic deceleration and the pandemic.
SECOND-HALF BLUES
Key business people believe that the Bank of Thailand is sending a signal to warn that the global economy will remain weak in the second half amid worries that Thailand may encounter another financial crisis similar to the 1997 episode.
Although many countries have eased business lockdown orders and injected several billions of dollars into their economies to relieve virus impact, it's difficult to say when the world will recover from the financial ailment.
"We believe the central bank sees signs that the economy will continue to shrink," said Kriangkrai Tiannukul, vice-chairman of the Federation of Thai Industries. "This will make small and medium-sized enterprises unable to pay their debts and even force many businesses to permanently shut down this year."
The upmost concern is an increase in NPLs among fragile SMEs.
Wongsakorn Prasitvipat, managing director of SET-listed developer Property Perfect Plc, said a stricter mortgage loan rule has been one of the key concerns among property developers since last year.
"Aggravated by the virus pandemic, the mortgage loan rejection rate of our customers has risen by double to 30-35% from 15-20% earlier," Mr Wongsakorn said.
With the Bank of Thailand signalling a decaying economy, purchasing power in the property sector will slow for two years if banks become more cautious in loan approval, he said.
During the outbreak, banks applied stricter requirements to those whose careers were affected by the virus, including aviation jobs and tourism-related businesses.
Many of those working for restaurants were unable to get mortgage loan approval.
Meesak Chunharuckchot, president of the Chon Buri Real Estate Association, said homebuyers working for the export or industrial sectors, particularly in auto parts, are required to have co-borrowers to qualify for mortgage loan approval.
"Their overtime and working days have been cut off," he said.
Lamonphet Apisitniran and Kanana Katharangsiporn
