Listed Thai banks reported a further decline in profitability in their preliminary full-year results for 2017, largely owing to an increase in credit costs.
Fitch Ratings expects impaired loans to level off this year as a more benign operating environment and tighter recent underwriting standards ease some of the pressure.
Its sector outlook for 2018 is stable, compared with a negative outlook in 2017.
Fitch said the 2017 results were weak, but not out of line with its expectations. There were still pockets of stress that impacted some banks last year – including large loan defaults by corporates, such as Energy Earth.
The SME sector has also continued to suffer a relatively high rate of delinquencies. Accordingly, impairment charges rose to 42 per cent of pre-provision operating profit, from 37 per cent a year earlier and 24.2 per cent at end-2014.
Rising credit costs, along with tight net-interest margins, pushed banks’ average return on equity down to 10.3 per cent, from 11.9 per cent the previous year.
Fitch believes the credit cycle is now close to bottoming out as downside risks to the operating environment have declined.
Fitch forecasts GDP growth to remain stable, at slightly below 4 per cent. This is still sluggish compared with Thailand’s historical growth rates, and is likely to limit banks’ growth opportunities, but it should be enough to ease delinquency rates and keep banks’ earnings relatively stable.
Meanwhile, banks appear to have become more cautious in their lending decisions – as reflected by a sharp slowdown in credit growth in the last two years – which should support some stabilisation in asset quality.
The Bank of Thailand’s loan officer surveys further point to stronger underwriting standards, while banks’ increased use of SME credit insurance should help protect them against further strains in that sector.
Vulnerabilities in the consumer sector may also be starting to recede. High household debt could still be a source of asset-quality risk, but household borrowing has at least levelled off in recent quarters. The household debt-to-GDP ratio peaked at 81 per cent at end-2015, and had fallen back to 78 per cent by 3Q17.
Banks’ core capital ratios continued to increase in 2017, despite pressure on earnings, and provide strong buffers against the impact of IFRS 9 adoption in 2019 and economic shocks.
The five largest banks are also well-placed to meet the Bank of Thailand’s requirement that domestic systemically important banks (D-SIBs) hold an additional 0.5 per cent of core capital from January 2019.