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Coup is credit negative for Thai banks: Moody's

The removal of the interim government and suspension of the 2007 constitution are credit negative for Thailand's banks, said Moody's Investors Service.

"They add pressure to already weakened investor and consumer confidence and risk stalling loan growth and undermining asset quality," the rating agency said in its credit outlook report.

It added that even before these most recent events, the house revised downward the 2014 expectation for Thai bank loan growth to 7-8 per cent, from the average of 13 per cent for 2011-13 due to the political turmoil.

"Owing to Thursday's events, we now expect that growth will be even lower, although the severity will depend on how long the political and resulting economic uncertainty persist. In the first quarter of 2014, loan growth was just 1.2 per cent on a quarter-by-quarter basis, which is the slowest pace since the third quarter of 2010. The more protracted this crisis, the lower our economic growth expectations become, which, in turn, will lower loan demand," it said.

Thailand's political crisis is also threatening banks' asset quality. Banks are increasingly cautious about lending to the retail and small and midsize enterprise (SME) segments, which are most vulnerable to the economic slowdown. Although nonperforming loan (NPL) formation remains low (see exhibit), it noticeably increased across all segments in the first quarter, particularly the in retail sector and the smaller end of the manufacturing-related SME segment.

Although the effect on the banks' overall asset quality should be moderate because the most vulnerable segments - retail unsecured, auto loans and small SMEs - constitute a small proportion of banks' overall loan book, the downside risks are increasing as economic conditions deteriorate. Retail unsecured and auto loans comprised 16 per cent of the banking sector loan book at the end of March 2014 and most rated banks' balance sheets are skewed toward the larger SMEs and industrial corporates, whose financial health has remained intact. The exceptions are Government Housing Bank of Thailand (Baa1 stable, E+/b1 stable2), SME Development Bank of Thailand (Baa2 stable, E/caa1 positive) and Bank of Ayudhya (Baa1 stable, D+/ba1 stable).

To face mounting NPLs, Thai banks have sizable buffers, as reflected by a system-wide Tier 1 ratio of 11.8 per cent and a loan-loss reserves ratio of 135 per cent.


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