The Nation


Banking outlook

Loan growth expected to drop to single digit

THE Banking industry will most likely slow to single-digit loan growth this year from double digits over the past few years because of political unrest and lower demand from corporate and individual borrowers.

The political uncertainty has hurt investment both public and private, while tapering of the United States' quantitative easing (QE) programme, which should kick off in the near future, is another factor squeezing liquidity. The low interest rates may not encourage consumers to deposit money with banks.

High household debt leaves little borrowing room for consumers, so credit demand for durable goods from retail customers or for projects from private customers will wither.

Fitch Ratings has noted that the move towards interest-rate normalisation has begun to expose economic imbalances, leading to currency pressures and higher market rates.

This adjustment will test loan quality where credit expansion has been rapid, particularly in some parts of emerging Asia such as Indonesia, Thailand and Malaysia, where a rapid build-up of household debt has occurred.

This may become a source of asset-quality problems if unemployment and inflation rise. In most cases earnings and capitalisation buffers remain solid to offset higher credit costs, while funding and liquidity profiles are comfortable to absorb any currency pressures.

Siwat Luangsomboon, head of money and banking research at Kasikorn Research Centre, said the growth of the banking industry depended on the growth of gross domestic product. The slower growth of GDP has dragged on the loan expansion of the banking industry.

Consumers are not confident in spending much money because of the economic uncertainty. If the political situation does not improve, consumer spending will be weaker than previously expected.

The banking industry enjoyed double-digit loan growth for many years, driven by retail customers who availed of the government's populist packages such as the first-car and first-home schemes.

Consumers have taken on much debt in the past two years, so their financial burden is high and their ability to service debts is low. Retail customers will no longer be the key engine of loan growth this year.

Banks have become warier about extending loans to retail customers because the slowdown in economic growth will impair consumers' ability to pay off debt.

Businesses will be the new driver of loan growth because the private sector will turn to bank loans after raising funds last year, as the market forecasts interest rates to move upwards because of a recovery of the global market and the QE tapering in the United States.

The loan portfolios of the banking industry will expand by 8-10.5 per cent, but more towards the low end because of the many risks especially from the political situation.

With tepid loan growth, banks will have to offer total solutions to boost fee-based income. Banks with a high concentration of retail loans will aim more at businesses.

The banking industry will no longer aggressively chase after loans like before. It will go back to focusing on risk management and improving back-office operations.

It will not be easy for banks to reach new heights as they did in the past two years.

Siam Commercial Bank will slow down loan building in line with the market, since the economy is no longer on an uptrend, president Kannikar Chalitaporn said.

Based on the expected loan growth of the banking industry of 8-9 per cent, SCB has trimmed its loan-growth target to 10 per cent from 12-15 per cent last year.

Among major banks, SCB averaged annual loan growth of 20 per cent in the past three years, while the market grew at 15 per cent. This helped SCB boost net profits from Bt24.20 billion in 2010 to Bt36.27 billion and Bt40.22 billion in the following two years.

Small banks such as Tisco and Kiatnakin, which also feasted on annual double-digit loan growth for many years thanks to booming auto sales, will move into business lending as they expect car loans will run out of gas.

Tisco Group chief executive officer Oranuch Apisaksirikul said the bank had to figure out how to maintain profitability, as it might not replicate the 20-per-cent annual growth rate of the past two to three years. There are many small and medium-sized enterprises in the country. Tisco should actively pursue these consumers to diversify its loans.

Kiatnakin Bank president Aphinant Klewpatinond said it would start up an SME business unit after setting up a corporate-loan business last year. It has already booked one syndicated loan, which the customer will start to draw on early this year.

Kasikornbank will focus on upgrading its information-technology system and persuading talented staff to stay with the bank as it knows the key to long-term success of the banking industry is human resources, said Banthoon Lamsam, chairman and CEO.

"When loan growth is slower, the bank should maintain profitability through fee-based income and develop innovative products and services to attract existing customers and new-generation customers," he said.

KBank targets loan growth at 9-11 per cent, similar to last year, while Bangkok Bank has maintained a loan-growth goal of 5-6 per cent based on GDP growth of 3.2-3.3 per cent. Among the top four banks, Krungthai is the only bank that continues planning for aggressive growth at 1.5 times GDP growth. Based on its forecast of GDP growth of 4 per cent, KTB's loans will expand 12 per cent.

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