Thai banks likely to maintain good asset quality for rest of year, S&P says

Predicting risks of economic imbalances, Standard & Poor's Ratings Services expects Thai banks to continue showing strong asset quality over the next 10-12 months.

In a report titled "Thailand Banking Outlook 2013: Rapid Growth Could Create Imbalances", the rating agency expected asset quality to remain stable in 2013.

"We believe that the potential build-up of economic imbalances will not strain banks' asset quality given Thailand's favourable economy. Bank earnings are also likely to be steady because the scheduled cut in corporate tax rates should offset any pressure on margins. The pressure would start showing only with a lag," it said.

S&P anticipates Thailand's economic environment continuing to be favourable for banks this year, with gross domestic product growing by about 4.7 per cent and unemployment staying low. These factors will further underpin banks' stable asset-quality metrics.

However, it views as a risk the rapid growth in consumer loans, particularly for cars and condominiums.

Consumer loans grew by about 22 per cent last year. The competition in this segment is intense, and is already weighing on banks' margins. Such high growth amid intense competition could also lead to a loosening of credit standards and contribute to deteriorating loan performance in that segment.

Currently, condominiums form a very small segment of the loan portfolio, but car loans amount to about 8 per cent of total lending of the banking industry.

"We expect the Thai banking sector's return on assets to remain flat at about 1.2 per cent, the same level as in 2012," S&P said. "Lower corporate tax rates and higher fee income should offset the likely decline in margins stemming from increased competition.

"Nevertheless, the pressure on margins is likely to be limited because we do not expect banks to aggressively cut prices. Moreover, banks' provisioning costs are also likely to remain steady given our expectation of stable asset quality."

SEVEN BANKS RATED

In terms of capital adequacy, the rating agency is convinced that the banks will comfortably meet the Basel III rules. The new norms require banks to hold a minimum Tier 1 ratio of 8.5 per cent (including capital conservation buffer) and a minimum total capital ratio of 11 per cent by January 1, 2019. A capital conservation buffer is additional common equity that banks are required to hold over their minimum Tier 1 and total capital ratios.

The banking sector's liquidity is expected to stay satisfactory. Banks benefited last year with funds moving towards deposits from bills of exchange as the central bank imposed a fee on B/Es, reducing the incentive for banks to issue them.

"The sector's loans-to-deposits ratio improved to 96.4 per cent compared with 107.8 per cent in 2011. We expect the ratio to remain at a similar level in 2013.

"We view the credit profiles of most of the banks we rate in Thailand as stable. The solid business position, stable risk position, and average funding and liquidity profiles of most of these banks support our view.

"The outlook on all the banks we rate in Thailand is stable, except for TMB Bank, on which we have a positive outlook. The stable outlooks reflect our view that continued political uncertainty and unstable government policies will not significantly impair the performance of Thailand's economy and its banking industry," it said.

A downgrade in the banks' ratings could take place if political instability results in a sovereign downgrade, and it may lower the Banking Industry Country Risk Assessment score for Thailand if the economic imbalances heighten because of rapid growth. A lower score could lead to a drop in anchor ratings and in turn weaker credit profiles for some banks.

"However, we expect government or parent-group support to offset negative rating implications for most banks.

"We could upgrade a few Thai banks if we raise the sovereign rating and the banks maintain their standalone credit profiles. For some others, an improvement in standalone credit profiles could also trigger an upgrade.

"Thai banks have experienced strong growth trajectory in recent years, and we expect the pace of growth to moderate slightly this year.

"However, rising competition will likely lead to a loosening of underwriting standards, and this could weaken asset quality, but only with a lag."

Regionally, S&P views that Singapore banks have sound financial profiles and sufficient buffer against downside risks. They will likely face tighter credit conditions and slower economic growth this year. In particular, the banks' credit loss risks could soar because of overheating in the property sector.

However, the agency does not expect credit quality to deteriorate severely. Singapore's government has shown a readiness to rein in rising home prices. The slowdown in advanced economies will continue to hurt Singapore's export-oriented sectors, resulting in subdued loan growth.

"Vietnam banks will continue to face difficulties this year even as its economy recovers. We believe bank restructuring will be protracted, with industry consolidation, reduction in non-performing loans, enhanced regulations and governance, as well as stronger capitalisation.

"Credit growth, inflation, and interest rates have declined but leverage in the Vietnamese economy remains high, with the ratio of credit to GDP at more than 100 per cent.

"We don't expect asset quality to be strained in the banking systems of other Southeast Asian countries. Supporting factors include stable fundamentals, healthy economic growth, and adequate capitalisation."