The tax incentives encouraging Thai banks to merge could lead to a significant shift in the local sector landscape, with one or two of the largest domestic banks emerging in dominant positions, says Fitch Ratings.
Larger national champions would be in a stronger position to cope with competition from regional rivals, which is set to intensify along with Asean banking integration.
Thailand is in bilateral negotiations with Malaysia, Indonesia and Myanmar under the Asean Banking Integration Framework (ABIF), which would lower cross-border licensing restrictions, creating expansion opportunities for the strongest banks. The ABIF envisions qualified Asean banks being eventually allowed to operate more freely in the region, even if progress is likely to be slow and dependent on the political climate.
Thailand's largest banks have stronger customer franchises, more diversified business streams, and better through-the-cycle earnings potential than the medium and small domestic banks, which is reflected in their ratings. However, those large Thai banks are considerably smaller than Singapore's three banks and the two biggest Malaysian banking groups, and comparable with Indonesia's main players.
Opportunities for organic growth have been limited by a downbeat operating environment, with credit growth of just 2.4% in 2016 and 4.6% in 2017, albeit there have been signs of improvement in 2018, the international credit rating agency said.
Thailand's government has acknowledged the new incentives are targeted at boosting the size of the largest local banks, so they become more competitive regionally. We view the policy as a nationalistic move, which marks a shift in policy direction after years of allowing foreign banks to take control of local players, most recently with the acquisition of Bank of Ayudhya, the fifth-largest local bank, by Bank of Tokyo-Mitsubishi UFJ.
Larger banks would benefit from stronger economies of scale and would have a greater ability to service large conglomerates, owing to increased large exposure limits.
Bigger local banks might also pose larger risks to financial stability in the event of their failure.
The Bank of Thailand announced a stronger supervisory framework and higher capital requirements for domestic systemically important banks in September 2017, as a step towards full implementation of Basel III international regulations.