The credit profiles of Thailand's large banks are expected to benefit from the gradual recovery from the weak economic environment of 2020-21, according to Fitch Ratings. Increased business activity and stable, or slightly improving, net interest margins should support bank revenue.
Local banks have been aggressive in provisioning over the past several years. Fitch believes credit costs have peaked and, although they will remain elevated in the near term, they should be less of a drag on operating profitability.
However, the slowness of the recovery limits the prospects for a substantial improvement in asset quality.
The country's six domestic systemically important banks -- Bangkok Bank (BBL), Krungthai Bank (KTB), Kasikornbank (KBank), Siam Commercial Bank (SCB), Bank of Ayudhya (BAY) and TMBThanachart Bank (ttb) -- comprise the bulk of the banking system, with a combined deposit market share of around 84%. Aside from standalone factors, the banks' credit ratings are also underpinned by extraordinary support from their major shareholders or the government.
The issuer default ratings (IDRs) of the three largest private-sector banks -- BBL, KBank and SCB -- are equal to both their standalone profiles, denoted by their viability ratings, and their government support ratings, which reflect their systemic importance.
The government support rating of KTB is higher than that of the other banks because, in addition to its systemic importance, it is the only commercial bank majority-owned by the state.
The IDR of BAY, meanwhile, is driven by its bbb+ shareholder support rating due to its strategic importance to its Japan-based parent MUFG Bank.
Where asset quality is concerned, little improvement is expected in the medium term. This is because regulatory measures introduced during the pandemic, such as forbearance on loan classification for restructured loans, have reduced the full impact of stresses on bank balance sheets.
However, the expected gradual removal of these measures over the next two years could raise the banking system's impaired loans.
Still, the banks have built up key buffers such as loan-loss allowance coverage and core capital over the past few years. In our base-case scenario of a gradually improving economic environment, we believe current buffers would be a reasonable hedge against asset-quality challenges.
Fitch expects Thai GDP growth to recover to 3.2% in 2022 and 4.5% in 2023 after muted growth of 1.5% in 2021. While rising inflationary pressures are shifting the central bank's policy stance, interest-rate increases may be small, suggesting a limited impact on banks' asset quality or earnings.
INCREASED LEVERAGE
Private-sector leverage has surged since the start of the pandemic. Private-sector credit to GDP was 164% as of the end of 2021, up from 143% at the end of 2019, and household debt to GDP increased to 90% from 80% over the same period.
Commercial banks account for only around 43% of total household debt, while other financial institutions such as policy banks, savings cooperatives and microfinance companies are more exposed to higher-risk, lower-income segments. The banking sector as a whole was also not aggressively underwriting new loans, with slow long-term loan growth before the pandemic.
Nevertheless, debt is likely to remain high in the near term, which will reduce growth potential for banks and increase downside risks should the recovery be weaker than we anticipated.
Authorities have been active in managing the pandemic's impact on the financial sector. Measures for banks include loan classification forbearance for restructured loans, reduced interest rate caps on retail loans and special soft loans to SMEs.
Fitch estimates that over 10% of loans were still under relief as of the first quarter of 2022, with small and medium-sized enterprises (SMEs) most at risk with around 20% of loans under relief. Hence, notwithstanding the economic recovery, we expect non-performing loan formation to remain elevated in 2022.
Nevertheless, the regulatory measures have helped banks smooth out the impact of asset-quality stress and provisioning requirements.
SOUND FRANCHISES
The local banking sector is dominated by the six largest banks, which have been declared systemically important by the Bank of Thailand in recognition of their scale and systemic links. Scale offers significant advantages in terms of product capability, client reach and efficiency. The largest banks also have the resources to invest heavily, such as in digital banking, which would better position them for longer-term success.
Larger banks also tend to be stronger in terms of their deposit franchises and the ability to lock in stable low-cost deposits in transactional accounts. This supports their funding and liquidity profiles, as well as their longer-term cost competitiveness.
Each of the six largest banks has specific areas of strategic focus. BBL is the most international, with a region-wide presence that supports its large corporate clients. SCB and BAY are more retail-focused, while KBank has a larger presence in the SME segment. KTB, being state-owned, has strong state links on lending and deposits.
The weak economy during the pandemic led to low loan growth, although disparities across the banks showed the differences in their strategies. KBank has been the most aggressive in seeking growth, which may lead to greater asset-quality pressure should the recovery be protracted. KTB's growth has also been faster, but this has mainly been from loans to low-risk government-related entities. TTB, meanwhile, has been more focused on completing its merger with Thanachart Bank rather than organic growth.
An environment of low interest rates and slow economic growth compared with other emerging markets mean that revenue opportunities are becoming more limited in traditional commercial banking activities. As a result, we expect further transformative moves, which could include shifts in their risk profiles if the pursuit of earnings leads to higher-risk activities.