An improving operating environment amid a continued economic recovery, along with robust capitalisation and loss buffers, support a stable outlook for Thailand's banking system, says Moody's Investors Service.
"Thailand's sustained economic recovery will translate into an improving operating environment and boost loan growth, thereby supporting our stable outlook for the banking sector," said Alka Anbarasu, a Moody's vice-president and senior credit officer. "Some asset risks remain, including a large stock of restructured loans that have not been classified as non-performing, but the economic recovery and steady corporate leverage will keep asset quality generally stable."
Economic growth in Thailand will be driven by exports, tourism and domestic demand, further aided by accommodative monetary and fiscal policies amid subdued inflationary pressure, the international credit rating agency said in its "Banking System Outlook" report for Thailand.
Specifically, Moody's expects Thai GDP to expand by 4% in 2018 and 3.7% in 2019 after 3.9% growth in 2017 and an annual average in excess of 2.8% for the five years to 2017.
Against this backdrop, Moody's expects the formation of new non-performing loans (NPLs) to have peaked, though some risks remain.
In particular, many of the restructured loans are to small and medium-sized enterprises (SMEs) in industries that are losing international competitiveness, such as computer parts and textiles. In the retail loan sector, mortgages with high loan-to-value ratios and personal loans to SME operators will keep NPL formation levels elevated.
These risks are mitigated, however, by Thai banks' strong capitalisation and large loan-loss reserves.
Moody's expects capitalisation, a credit strength for the banks, to improve further from already-strong levels, as their internal capital generation will outpace modest asset growth, thanks to robust profitability.
Thai banks will also continue to demonstrate robust funding and ample liquidity because of the predominance of retail deposits. Loans and deposits will grow in tandem, keeping loan-to-deposit ratios stable.
Profitability will gradually improve as the stabilisation of NPL formation rates results in lower credit costs. Fee income, however, will decline, as the banks have started to waive fees on digital transactions.
Finally, Moody's expects the Thai government to remain willing and able to support the banking sector, as it has done over the past three decades.
In the longer term, the introduction of a resolution regime could change Moody's support assumption, but little information is available at this point regarding such a legislative change.
Moody's rates nine commercial banks that together accounted for 86% of commercial bank assets as of March 31. In addition, Moody's rates two policy banks that are wholly owned by the government.
Fitch echoes findings
The first-half results for listed Thai banks showed that the asset-quality cycle has started to stabilise, with positive impact on banks' profitability and buffers, according to Fitch Ratings.
The trend is in line with Fitch's expectations and is consistent with the revision of the banking sector outlook for 2018 to stable last November. The outlook had been negative since 2014.
The average impaired-loan ratio of the listed banks was 3.71% at the end of June, virtually unchanged from 3.73% at the end of 2017.
Fitch expects the ratio to be stable for the rest of the year, due to more benign economic conditions and tighter underwriting standards among commercial banks. Credit growth remains relatively low, with gross loans up by 3.4% so far this year, though some segments, such as auto loans, are picking up.
Auto loan growth was driven by strong car sales growth of 19.3% in the first half of the year.
Average profitability improved slightly, with return on assets of 1.35% in the first half of 2018, compared with 1.3% in the first half of last year. This was driven by lower credit costs, which was evident in the decline in loan-impairment charges/pre-impairment operating profit to 36% in the first half of this year from 39.6% in the same period last year.
Fitch expects the ratio to remain under control over the course of 2018. The improved business environment mitigated flat growth in net fee income, which was hurt by intensifying competition and fee waivers for digital banking that began in March 2018.
There appears to be downside risk building in some portions of the property sector, but overall property price indices have remained resilient in the last few years, and the central bank has room to implement further macro-prudential measures if required.
Listed banks in Thailand continued to report sound loss-absorption buffers. Average loan-loss allowance/impaired loans was 143% (up from 140% at end-2017), and the common equity Tier 1 capital ratio was between 12% and 19%, well above regulatory requirements.
Fitch expects Thai banks to continue to maintain excess buffers that would support their ratings in the event of unexpected losses during an economic slowdown.