Fitch Ratings has downgraded the outlook for the Thai banking sector to neutral from improving, citing a subdued pace of economic recovery that is likely to constrain earnings growth.
Slowing exports and weak consumer sentiment have negatively impacted Thailand's economic prospects, prompting even the Finance Ministry to lower its GDP growth forecast for this year from 2.8% to 2.4%, according to the credit rating agency.
The Thai banking system's operating profit to risk-weighted assets ratio increased to 1.9% in 2023 from a pandemic low of 1.2% in 2020, driven by rising interest rates and reduced credit costs.
However, Fitch believes the earnings recovery has peaked, with limited room for further improvements in banks' net interest margins or provisioning expenses.
In addition, low levels of economic activity are expected to affect loan growth, which Fitch now forecasts at 3% in 2024, down from an original projection of 5%.
The agency projects a slight increase in the banking sector's impaired loan ratio to 3.5% in 2024, up from 3.3% last year, attributed to the lingering effects of pandemic-era debt restructurings.
However, downside risks to asset quality are mitigated by robust reserve levels, with the sector's loan-loss allowance coverage maintaining a healthy 173% in the first quarter of 2024.
"The issuer default ratings on Thailand's six domestic systemically important banks are also supported by government support ratings or shareholder support ratings. Hence, rating downside would depend on changes in our assessment of extraordinary support prospects," said Fitch Ratings.
Over the longer term, sustained weak growth poses strategic challenges for Thai banks. Fitch expects Thai banking groups to increasingly seek other business opportunities, such as in non-bank financial institutions or overseas expansion, which could impact their risk profiles.
Similarly, S&P Global Ratings noted that Thailand's sluggish recovery is weighing down local banks. The sector continues to struggle with elevated credit costs and weak loans originating from the pandemic.
S&P Global Ratings believes 2024 will test the resilience of lenders as they come to terms with the expiry of a pandemic-era loan restructuring scheme designed to help vulnerable industries and weak borrowers, according to its report published in February.
Thai banks have been bolstering their defences in anticipation of a likely rise in non-performing loans. The industry has been setting aside provisions against loan losses, with the average coverage ratio for the sector exceeding 180% as of the end of 2023.
Banks have maintained a healthy capital adequacy ratio of around 20%, comparing favourably with regional peers, according to S&P.