Thai banks' loan growth is likely to accelerate in the second half of 2014, after domestic-listed lenders posted an increase of just 1.5 per cent year-to-date in the first half, says Fitch Ratings.
This will be reflective of an improving macroeconomic environment.
However, Fitch cautions that asset-quality pressures on the banking system are likely to remain – given Thailand’s rapid accumulation of private-sector debt since 2011, combined with the weak economy from the second half of 2013 through the first half of 2014.
Aggregated second-quarter performance data for Thailand’s 11 listed domestic banks reflect a continuation of the weak macroeconomic and business environment. Profitability and loan growth improved from the first quarter, but loan growth in particular continued to be slow relative to its historical average.
A positive note is that impaired loans and the total regulatory capital ratio have both remained roughly flat over the last few quarters, at 3.0 per cent and 15.5 per cent respectively.
Fitch has maintained that Thailand’s economy is reasonably well positioned to rebound from short, negative shocks, and the country is likely to be able to avoid a protracted recession and recover steadily – assuming a continuation of the relative stabilisation of the political environment since June.
The credit environment has turned more cautiously optimistic for banks, and Fitch expects they will target increased lending through to the end of this year. The agency expects credit growth of above 5 per cent for the full year, as economic growth gradually picks up from the slowdown in investment and weak consumer confidence.
Regulatory capital ratios are likely to remain stable alongside the improving credit environment. There should be a continued trend for Thai banks to issue Basel III Tier 2 notes over the next 18 months, but this will principally be to replace legacy instruments that are being redeemed or amortised – and not an indication of capital strain.
Yet the rapid accumulation of private-sector debt since 2010 remains a concern for the banking sector despite the generally stable short-term outlook. As of March this year, bank credit to the private sector represented nearly 155 per cent of gross domestic product. As a result, Thailand now has among the highest ratios of private-sector debt to GDP in emerging markets.
This, in turn, suggests that asset-quality pressures remain a risk in light of the combination of a very rapid accumulation of debt with the marked slowdown in economic activity.