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 Downside risks look limited as valuations of all the big-cap Thai banks have fallen to near 2001 and 2003 levels. Unlike the United States, Thailand is not facing a banking crisis. Most of the big banks are operating with high margins, though political instability might weigh further on the economy.

The banks are still expanding their credit, with healthy growth. Margins are also fat. At the same time, the 10-year bond yields peaked at 6 per cent at the end of June, implying that inflation concerns might have already been priced in.

Most research houses, including Citigroup, expect a fairly robust result in the second quarter from the banks. All four big banks have managed to keep their credit growing, improve their margins and sustain their fees. Although the economic slowdown brought about as a result of higher oil prices and political instability might result in an increase in non-performing loans, it should not hurt the banks in the second quarter.

Headline inflation hit 8.9 per cent in June, with warning signals from banking authorities that it might peak in the double digits in coming months. Some expect inflation to peak at 12 to 13 per cent before receding. But core inflation will surpass the Bank of Thailand's target of 3.5 per cent, prompting policy complications. In the second half of this year, weaknesses in the economy will pose more of a threat to it than inflation.

Still, there is a lot of work for the Monetary Policy Committee to do in order to reduce inflation pressure. Another 50 basis points are expected to be cut from the interest rate in the second half of this year after authorities raised the interest rate by 25 basis points on July 16 for the first time in two years. The central bank is likely to go ahead with its hawkish stance toward the end of the year because of political instability. The latest rate increase has upset a lot of politicians, who are afraid that it could further hurt economic recovery.

Overall, the big banks should manage through the political storm and the economic downturn with strong balance sheets. This bodes well for the economy, which is looking for some room to grow on the back of falling confidence.