Moody's warns of erosion in profitability

Moody's warns of erosion in profitability

Thai banks' profitability will deteriorate as interest rates stay low for a prolonged period as the central bank maintains a loose monetary policy to fight the sharp economic downturn caused by the coronavirus outbreak, says Moody's Investor Service.

Narrowing net interest margins (NIMs), combined with weakening loan growth, will reduce net interest income, the main source of profit for Thai banks, said Moody's.

Contraction of interest margins and weaker loan growth will hurt banks' profitability and banks' NIMs will continue to narrow as monetary easing to counter economic disruptions from the outbreak weighs on asset yields.

"This, combined with weaker loan growth, will erode banks' net interest income, their dominant source of revenue, and consequently, their profitability," said the international credit rating agency.

Rated banks earned about 71% of revenue from net interest income in the first half of 2020, according to Moody's.

Interest rates in Thailand will stay low for a prolonged period as the Bank of Thailand is likely to maintain accommodative monetary policy to support economic recovery, said Moody's.

Thailand's central bank has progressively cut its policy interest rate to a historical low of 0.5% from 1.25% at the beginning of 2020.

In September, the central bank reiterated its commitment to keeping rates low as it expects economic recovery to take at least two years, said Moody's.

The continuation of monetary easing will weigh on banks' NIMs.

About 70% of banks' assets carry floating rates and will be repriced at lower interest rates in 2020, said Moody's.

"On the other hand, banks have limited room to reduce funding costs because low-cost deposits are their main funding source," said Moody's.

Current and savings account (CASA) deposits account for 53% of system-wide liabilities as of June 2020, for which rates are already low, with little room for further reduction.

CASA deposits will increase even further as monetary easing releases more liquidity into the system, with risk-averse investors leaving their funds in CASA accounts at banks, said Moody's.

"With the funding structure concentrated on CASA deposits, banks will not be able to lower funding costs as much as reductions in asset yields, which will result in a narrowing of NIMs."

At the same time, deteriorating economic conditions will dampen credit demand.

"On the supply side, banks are also tightening their underwriting standards as the credit profile of borrowers deteriorates," said Moody's.

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