Banks face hard year as asset quality dips
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Banks face hard year as asset quality dips

Loan moratoriums to progressively expire

Thai banks' financial resilience will be tested this year as debt moratoriums gradually expire, with asset quality and the non-performing loan (NPL) ratio poised to deteriorate, says S&P Global Ratings.

Relief measures have blunted the impact of Covid-19 on local financial institutions, but 2021 is a year where loan moratoriums are set to progressively expire, said S&P.

"We expect banks' asset quality to deteriorate in the next 12-24 months and the NPL ratio to increase up to 6%."

"Reported NPLs remained benign in 2020, averaging 3.3% for the banks we rate, only modestly higher than 2019's systemwide average of 3%. This resilience comes despite a second wave of Covid-19 infections late last year."

The proportion of the loan book under moratorium has declined to an average of 20% for major rated Thai banks, compared with systemwide average of 31% in the initial phase of the moratorium in mid-2020.

"In our opinion, temporary relief measures are unlikely to eliminate risks for weaker and more vulnerable debtors, although they may lessen the strain and delay recognition of problem loans. The central bank extended debt moratoriums for the more vulnerable retail and small to medium-sized enterprise [SME] borrowers to June 2021," said the international credit rating agency.

Credit risk is already heightened in Thailand given the elevated household debt situation. The household debt level jumped to 86.6% of GDP in the third quarter last year, the highest level recorded since the data was made available in 2003, according to the Bank of Thailand.

As of September 2020, household debt, which was already among Asia's highest, had risen to 13.77 trillion baht from 13.58 trillion baht at the end of June when it was equal to 83.8% of GDP.

Another vulnerability is the tough environment for export-oriented SMEs, some of which are getting priced out by more cost-efficient manufacturers in Vietnam and Cambodia, said S&P.

"We expect credit losses for the banking sector to remain elevated at 1.9% of outstanding loans this year, from 1.2% in 2019. Credit costs have heightened across the board, which has dragged down the return on assets of rated banks to 0.7% in 2020, versus the systemwide average of 1.4% in 2019."

Proactive provisioning coupled with good capital levels will continue to provide a cushion for downside credit risks, according to S&P. Rated Thai banks have beefed up already high provision coverage ratios to about 155% as of year-end 2020.

"We believe banks will continue to build buffers in 2021 to defend against higher delinquencies as loan moratorium and relief measures are phased out."

"Even though large domestic banks maintained healthy tier-1 capital adequacy ratios of over 15%, the regulator has instructed banks to limit last year's dividends to 50% of profits and not to exceed the payout ratio in 2019."

Thailand is expected to see a U-shaped economic recovery in 2021, with GDP growth seen at 5%, said S&P.

"This revival is needed to stabilise credit conditions. A prolonged delay in the country's economic recovery would deepen the downside scenario for domestic banks, given high household leverage and the weakness in the SME sector."

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