• 
• 

Published on April 16, 2008

This was exacerbated by the provisioning rule of 2006-07, with some banks reporting losses. However, the credit profile of most banks remains strong with ratings stable, similar to the rest of Asia. Tempering that view is the increasing polarisation of the banking industry, with the top four remaining robust with solid loan growth and stable margins, supported by strong retail deposit bases that let them to outperform smaller rivals. Clearly, franchise strength has played an important role. The top four banks continue to maintain strong capital bases, while smaller banks have seen theirs pressured from aggressive growth strategies. Some mid-sized banks, though, have firmed up their footing by inviting foreign partners in.

This year will be one of transition under a new regulatory environment, with the implementation of Basel II at the end of the year and the passage of the Deposit Protection Agency Act and Financial Institution Business Act.

The banking industry will also follow the trend seen in South Korea, where state-owned institutions that were rescued during the Asian crisis through injections of government funds are being released into the private sector. The Financial Institutions Development Fund holds a few such banks. While the active interest taken by foreign investors recently could bode well for the privatisation process here, progress is likely to be gradual.

Looking ahead, positive signs are becoming more visible, though uncertainty remains at the macro level. Loan growth has been reviving since the fourth quarter of last year. While non-performing-loan (NPL) resolution has been slow, momentum is building as asset disposal gathers steam. The slowing external market condition and any spillover to the greater economy is a risk to the NPL consolidation process. Nevertheless, we remain confident NPL levels will continue to improve over the longer term and that this will remove a rating constraint on both sovereign and bank credit.

Narumol Charnchanavivat is a fixed-income credit analyst for global research at Standard Chartered Bank.