Fitch Ratings Thailand forecasts Thai commercial banks' profitability to be restricted for the next few years, given the country's slow pace of economic recovery from the impact of the Covid-19 pandemic.
The credit rating agency said in a statement on Wednesday Thai banks' operating environment remains challenging because of a slow economic recovery and continued downside risks related to the pandemic. This will be particularly demanding for banks' vulnerable clients, such as small businesses. Even so, the risk of a severely stressed macroeconomic scenario has eased compared with last year, and business activity in 2021 should show some rebound from the low base of 2020, it said.
The Thai economy was hit hard, with GDP contracting by 6.1% in 2020. Fitch expects GDP growth to recover modestly in 2021 and 2022, by 3.7% and 3.6%, respectively. There are downside risks to the 2021 forecast, and the pace of recovery is weaker compared with most emerging market peers in the region. This slow path to pre-pandemic levels will limit the near-term upside for banks' financial performance.
Fitch lowered the operating environment mid-point for Thai banks in April 2020 from 'BBB+' to 'BBB' with a stable outlook, due to the significant and sustained downside risks the pandemic posed to banking sector performance. The current weak economic prospects are already largely reflected in the score.
The impact of the pandemic on banks' asset quality has been tempered by regulatory relief measures such as debt moratoria and restructurings, as well as lenience in relation to loan classifications. The amount of loans under relief has fallen substantially from its peak in July 2020 and should decline further over the coming quarters, as measures are much more targeted than earlier in the pandemic. Fitch estimates the portion of loans under relief at commercial banks and non-bank financial institutions, but not including at state policy banks, was at 17% at the end of 2020.
Asset quality risks are also mitigated by loss buffers. The Thai banking sector's loan impairment charges rose by more than 40% in 2020, and loan-loss allowance coverage was at 142% of impaired loans at year-end. Management overlays for provisioning will likely be used in 2021 as loan impairments rise. However, there is scope for credit costs to stabilise or fall slightly, as long as there are no further major disruptions to business activity.
Fitch downgraded the viability ratings of several major Thai banks last year to reflect anticipated pressures on asset quality and earnings over the next few years. The banking sector's performance and prospects have broadly been in line with the credit rating agency's expectations.