Thailand's banking sector faces lingering asset-quality risks, but these are unlikely to impact banks' standalone credit profiles significantly in the near term, according to Fitch Ratings.
The country's economic recovery in the wake of the Covid-19 pandemic remains slow and the level of vulnerable borrowers is high. Small and medium enterprises are a key contributor to non-performing loan formation, owing to the segment's large share of total bank loans, sensitivity to economic conditions and lower repayment buffers. Pressure could also stem from certain retail borrowers.
However, we believe asset-quality risks are well recognised by banks, with the loans of weaker borrowers already categorised as impaired or written off. Banks have also set aside a large provisioning cushion, with loan-loss allowance coverage of 177% as of the end of 2023.
Asset quality risk could rise if economic activity is substantially weaker than we expect. The high household leverage in the system presents downside risk should borrowers' repayment ability unexpectedly decline due to macroeconomic conditions.
That said, the asset quality scores assigned by Fitch for rated Thai banks reflect our view that any deterioration would be modest and could be mitigated by the high level of loss-absorption buffers.
Weakening asset quality alone is unlikely to affect the banks' standalone viability ratings unless we also reassess multiple other rating factors, such as risk profile, earnings and profitability as well as capitalisation and leverage, or lower the operating environment score.
The banks' issuer default ratings (IDRs) incorporate our expectation of extraordinary support from the government or foreign shareholders if needed. Therefore, a downgrade of the banks' viability ratings would not necessarily lead to a downgrade of their long-term IDRs.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com.