Bank of Thailand governor Veerathai Santiprabhob has thrown his support behind the government's tax incentives to encourage consolidation in the local banking sector, saying mergers and acquisitions will reinforce banks' competitive edge and level the playing field against regional peers.
Size matters in the banking business and such mergers would strengthen the competitiveness of local lenders amid intensifying competition in the region, he said.
With the larger size, local banks can better facilitate the rising number of large Thai corporations that are expanding overseas, cut down on costs per client, improve risk management and create economies of scale, he said.
The cabinet last week approved tax deductions and exemptions in an effort to encourage mergers among Thai banks to create large "champion" banks that are able to compete with foreign banks.
In terms of assets, banks in Singapore and Malaysia have assets worth more than 4 trillion baht, while Thailand's largest lender Bangkok Bank had assets worth 3.08 trillion baht at the end of last year.
Under the tax incentives, which will be effective until the end of 2022, merged banks can deduct corporate income tax and receive a waiver from value-added tax, specific business tax and revenue stamps.
Banks with total assets valued at more than 4 trillion baht will be allowed to deduct double their expenditures, while those with assets worth 3-4 trillion can deduct up to 1.75 times.
Merged banks with assets worth 2-3 trillion baht will be permitted a deduction of 1.5 times, and those with assets valued at 1-2 trillion baht will receive a deduction of 1.25 times.
The tax privileges have prompted speculation that the measures are aimed at paving the way for the amalgamation of specialised financial institutions', while stock analysts have pointed out that a merger between Krungthai Bank and TMB Bank is possible as the government owns the majority of both banks.
Moreover, TMB chairman Rungson Sriworasat's recent remark that an agenda related to a merger will be forwarded for discussions during the bank's board of directors meeting has further fuelled speculation.
"The tax incentives will be available until 2022 to encourage mergers among local banks. This is a good time for financial institutions to benefit," Mr Veerathai said.
However, he does not think that the current asset size of local banks would impact the provision of financial support for foreign direct investment in the Eastern Economic Corridor because investors have several funding source alternatives, including equity and bond markets, he said.
Predee Daochai, Kasikornbank's president, said that his bank has not discussed the merger measures yet, but continues to explore investment opportunities in Asean+3 countries.
The tax incentives are aimed at encouraging local banks to voluntarily merge if the opportunity arises in the future, he said.