A high level of non-performing loans (NPLs), slow loan growth and rising household debt will continue to pressure banks until the first half of next year as a reduction in consumer purchasing power and rising living costs will affect not only small businesses but also large companies, analysts say.
Krungsri Securities (KS) has downgraded the banking sector to 'bearish' from 'neutral', although most banks reported better than expected net profits in the second quarter, due to "increasing asset quality risks", said analyst Chayaporn Tocharoen.
"These risks stem from the uneven economic recovery, political instability, rising household debt and increased living costs, which are reducing purchasing power and debt repayment capacity. We believe these issues are not only affecting the retail and SME [small and medium-sized enterprises] segments but are now extending to large businesses," she said.
This is expected to result in higher credit costs, higher NPL ratios and slower overall loan growth as banks tighten their lending criteria, added Ms Chayaporn.
"We expect to see a continued increase in NPLs across all segments, leading to higher credit costs and NPL ratios. Banks are likely to manage asset quality by tightening lending criteria, resulting in flat to contracting loan growth."
KS anticipates these challenges will persist through the first half of 2025. Consequently, the brokerage projects banks' net profit growth for this year and 2025 to slow to 5-6% year-on-year, down from an 18% increase in 2023, she noted.
Nonetheless, the banking sector still offers attractive dividends, with expected yields of 5-9% annually. Dividend yields for the first half of 2024 are estimated at 0.4-3.8%, Ms Chayaporn said.
CGS International Securities (Thailand) shares a similar view, saying headwinds for banks would continue in the second half of this year.
"We see headwinds for the banks coming from higher NPLs, driven by housing and auto loans as well as unsecured loans," said analyst Weerapat Wonk-Urai, adding that the sector's NPL ratio rose to 3.68% in the second quarter from 3.61% three months earlier.
Siam Commercial Bank (SCB) is likely to be saddled with overhang from additional expenses in the third quarter related to the closure of its Robinhood app, according to management, and a rising NPL ratio in its consumer lending business, he added.
In his view, auto lending-focused banks, particularly TMB Thanachart Bank (TTB), Tisco and Kiatnakin Phatra (KKP), will continue to see sluggish auto loan growth, high losses from the sale of repossessed cars and muted fee income growth in the second half of 2024 and next year.
The brokerage, however, has maintained its neutral view on Thai banks with downside risks being "further asset quality deterioration and political unrest", said Mr Weerapat.