SLOW ECONOMIC growth and domestic consumption will weigh on Thai banks’ asset quality and profitability this year, according to a report titled “Thai Banks Face an Extended Credit Downcycle in 2017” released by S&P Global Ratings yesterday.
“Thailand’s banking industry will continue to face headwinds from problem
loans, high credit costs, and subdued growth prospects in 2017,” said S&P
Global Ratings credit analyst Ivan Tan. “We expect Thai banks’ earnings and
loan growth to be sluggish over the next 12 months.”
Lacklustre economic growth will continue to push up Thai banks’ non-performing-loan (NPL) ratio and constrain earnings growth. Elevated household leverage, persistent political uncertainty, and difficulties in |the commodities and SME |(small and medium-sized enterprise) segments will also continue to strain Thailand’s banking sector.
“Loans to SMEs have been the worst hit and will continue to drive Thai banks’ asset-quality deterioration into 2017,” Tan said. “Credit costs will also stay high as banks are under pressure to maintain sufficient provision coverage.”
That the credit downcycle is far from over is highlighted by the sharp increase in special-mention loans to 2.38 per cent at the end of the third quarter of 2016, from 2.17 per cent in the previous quarter, reversing five consecutive quarters of improvement. This is in spite of the government’s economic measures launched in 2015 to help SMEs tide over short-term operating difficulties.
The increase in restructured loans is another indicator of prolonged stress in asset quality.
Thai banks have maintained their provisions at high levels to buffer against rising NPLs. Provision coverage of the Thai banks S&P rates averages a high 120-130 per cent. In S&P’s opinion, this is attributable to a combination of prudent risk management and regulatory and peer pressure to maintain a certain level of provision buffer.
The downside risks for Thai banks are partly offset by adequate capital levels and provisioning buffers that were built up in earlier years.
S&P’s 2017 outlook for Thailand’s banking system is “stable”, with banks reacting with more of the same strategy revolving around tighter lending criteria, selective loan growth, and cost control