Silver lining in the debt deluge

Silver lining in the debt deluge

The head of Sukhumvit Asset Management believes NPLs can be contained even as tourism companies languish

"In preparation of higher NPL purchases next year, SAM plans to raise more funding and expolore new sources of funding mobilisation through the bond market." — Tharatporn Techakitkachon, President, Sukhuvit Asset Management Company (Photo: Arnun Chonmahatrakool)

Sukhumvit Asset Management Company (SAM) is optimistic non-performing loans (NPLs) in the hotel and tourism-related sectors can be contained as some investors are keen to extend fresh funding for properties with potential in preparation for the medical tourism trend when travel ramps back up again.

Liquidity support is a key tool to help these sectors combat the prolonged Covid-19 outbreak, Tharatporn Techakitkachorn, president of SAM, said in an exclusive interview with the Bangkok Post.

SAM is the country's second largest asset management company (AMC).

Hotel woes

The country's tourism industry has suffered during the pandemic, with a lot of hotels temporarily closed as they await a return to normalcy.

Thailand's tourism industry is expected to take 3-5 years to return to equilibrium, Mr Tharatporn said.

He said many investors are interested in the hotel business, planning to inject new funds into properties they view as having business potential.

These upgraded hotels can continue operations and the owners are not looking to sell, said Mr Tharatporn.

For instance, some shuttered hotels were bought by investors and renovated as hospitals and healthcare centres in response to demand for medical care as the country's demographics age. These renovated hotels are prepared for the medical tourism trend when travel ramps back up again.

He said banks' financial assistance in terms of debt restructuring and additional liquidity support can help some hotels survive. The Bank of Thailand's asset warehousing scheme is another possible solution to fend off NPLs in the hotel industry.

However, some hotels need to be closed permanently because of a lack of liquidity and should be classified as NPLs, said Mr Tharatporn.

Steady NPLs this year

The Thai economy may have bottomed out last year and its recovery this year has been weak and uneven, he said.

The NPL outlook in the banking sector looks to be rising, yet the increase should not be significant given the central bank's debt relief measures, which do not expire until the end of 2022, said Mr Tharatporn.

As a result, SAM expects the level of both NPLs and non-performing assets (NPAs) to be sold by banks to AMCs this year to be lower than normal.

In addition to debt relief measures, the central bank's relaxations of NPL classifications for the banking sector, support of bad asset management through joint venture AMC (JV AMC) licensing, and the recovering economy should slow banks' NPL sales this year, he said.

"We forecast secured NPL sales in the banking sector at 80-90 billion baht this year, compared with a typical average of 100 billion per year," Mr Tharatporn said.

SAM is well-versed in secured bad loan management rather than the unsecured variety.

The Bank of Thailand's Debt Clinic project, a restructuring scheme for unsecured loans, plays a key role in unsecured bad debt management, he said.

NPL buying strategy

Despite the prospect of a lower supply of NPLs this year, SAM does not have an aggressive strategy, instead planning to act in line with the market situation, said Mr Tharatporn.

The company will focus on helping those who defaulted on debt, especially small and medium-sized enterprises (SMEs), to recover from the pandemic crisis, he said.

SME NPLs represent the largest portion at 45% of total NPLs outstanding in the banking sector. The remaining portion is split evenly between retail and corporate loans, said Mr Tharatporn.

Outstanding NPLs in the banking sector increased to around 600 billion baht from 500 billion before the pandemic.

As an organisation not oriented towards making profits and wholly owned by the central bank's Financial Institutions Development Fund, SAM can play a major role in managing and resolving distressed assets of financial institutions and mitigating the country's NPL level, he said.

Though it is not SAM's sole focus, the company still wants to improve profitability and prepare to buy more NPLs next year, said Mr Tharatporn.

Rising trend next year

The impact of the pandemic the past few years led the central bank to implement several debt relief measures to ease the financial burden of both individuals and commercial borrowers.

The Bank of Thailand also relaxed the regulations for NPL classification to mitigate the burden of loan-loss provisions for financial institutions. These factors helped contain the NPL level the past two years, he said.

"With central bank relief measures due to expire later this year, NPLs are expected to increase in 2023, perhaps exceeding 100 billion baht," Mr Tharatporn said.

Meanwhile, special mention loans (SMs), which are classified as debt default of less than 90 days, have more than doubled to 1.1 trillion baht from the pre-pandemic value of 500 billion.

A portion of this uptick of 600 billion baht could eventually be classified as NPLs, he said. Good SM management is a key factor preventing a significant increase of NPLs, said Mr Tharatporn.

Normally SAM would buy 15-20% of the NPLs available from banks. The combined NPL purchases from the country's two largest AMCs, Bangkok Commercial Asset Management Ltd (BAM) and SAM, is around 40% of total NPL sales from banks per year, he said.

In preparation for higher NPL purchases next year, SAM plans to raise more funding and explore new sources of fund mobilisation through the bond market, said Mr Tharatporn.

The company plans to issue debentures worth 4-5 billion baht in the third quarter this year.

SAM believes it could raise 6-10 billion baht through the bond market in 2023 to buy more NPLs, he said.

Improving operations

The company aims to buy double the amount of bad assets this year compared with 2021, in line with higher NPL sales in the banking sector, said Mr Tharatporn.

For 2022, SAM expects banks to sell distressed assets worth 80-90 billion baht, up from 40-50 billion last year.

In addition, the company wants to improve NPL resolution and NPA sales by 30% year-on-year, he said.

SAM also set an ambitious goal to double business efficiency in the medium term after the company completes its digital transformation in three years.

The first phase of the transformation spans 2022-2024, focused on infrastructure.

After three years of development, the company aims to improve operational processes and bad asset management with more efficiency, said Mr Tharatporn.

"We target doubling our operations efficiency in three core areas: NPL restructuring, NPA sales and ability to buy bad assets," he said.

Setting up a JV AMC

Mr Tharatporn said collaborating with banking partners to set up JV AMCs would be a key business strategy to improve its business efficiency and help resolve NPLs in the banking sector.

SAM has been talking with potential partners to establish JV AMCs, he said.

Among the potential partners, SAM expects to see a clearer operating model for the JV AMC in the first quarter this year, said Mr Tharatporn.

SAM may set up 1-2 JV AMCs to manage the distressed assets of banking partners, he said.

The central bank allows financial institutions to apply for JV AMC licences for three years after announcing conditions last month.

A licence is valid for 15 years.

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