THE Bank of Thailand (BOT) has backed government tax initiatives that encourage mergers between commercial banks, with the central bank saying the time is right for lenders to pursue the advantages afforded by scale.
The BOT’s comments yesterday that size can help banks boost their operations, improve risk management and reduce funding costs coincide with a statement from Fitch Ratings that one or two of the largest banks could emerge as the dominant players.
The government last week announced tax incentives aimed at spurring consolidation in the industry and sharpening the banks’ competitiveness at a regional level.
Fitch said the measures would lead to significant shifts in the operating landscape of the country’s lenders.
BOT governor Veerathai Santiprabhob said that banks should act now in this window of opportunity provided by the government’s measures, which see the tax incentives and other measures applicable until 2022.
Officials say the tax incentives do not concern accounting treatments for a tax loss, but target tax requirements that can present as obstacles to mergers, and the changes would not result in any tax collected being returned.
The measures, released by the Finance Ministry, broadly aim to reduce merger-related expenses.
“Mergers will help in boosting competition among the commercial banks, enabling lower costs of financing and enhanced risk management with cheaper financing costs for the business sector,” Veerathai said.
He said that while banks of varying sizes are competing with each other, the Thai enterprises that they serve are growing every day. But the competitive pressures are not limited to Thailand, and are felt increasingly in the region, Veerathai said.
The larger the better
The larger financial institutions become, the better they will be able to serve a range of customers with better risk management.
“Thai enterprises are now larger in size and many of them are investing overseas,” Veerathai said. “However, there remain limitations in the capacity of many Thai financial institutions and they may not be big enough to provide sufficient financial services to these Thai enterprises investing abroad.
“In addition, financial institutions’ general businesses will gain from economies of scale, which holds that the larger enterprises can carry lower costs per unit compared with their smaller peers.
“We cannot say who will merge with whom. Presently, several banks have partnerships with foreign shareholders and foreign networks. “It’s difficult to say which one will be better off from pursuing working with partnerships or engaging in mergers. It depends on each financial institution’s policy. In the matter of mergers, it depends on the areas where a certain bank may need strengthening.”
In response to comments voiced that many Thai banks would not be big enough to accommodate the required investments in the Eastern Economic Corridor, Veerathai said that capital mobilisation can be done through a number of means. This includes tapping the capital markets, such as through bond issuance, and different means can complement each other, he said, adding that whatever the chosen method, it must be executed efficiently to ensure the targeted needs are met.
Fitch Ratings said the bigger banks to emerge from a period of consolidation – the national champions - would be in a stronger position to cope with competition from regional rivals. This rivalry is set to intensify as banking integration in the Asean region proceeds.
Thailand is in bilateral negotiations with Malaysia, Indonesia and Myanmar under the Asean Banking Integration Framework (ABIF) for reduced cross-border licensing restrictions - creating expansion opportunities for the strongest banks.
The largest banks have stronger customer franchises, more diversified business streams, and better through-the-cycle earnings potential than their small and medium-sized domestic rivals.
However, they are considerably smaller than Singapore's three banks and the two biggest Malaysian banking groups, and comparable with Indonesia’s main players. Opportunities for organic growth have been limited by a downbeat operating environment, with credit growth just 2.4 per cent in 2016 and 4.6 per cent in 2017, albeit with signs of improvement in 2018.
The government has explicitly acknowledged that the new incentives are targeted at boosting the size of the largest local banks, so that they can become more competitive regionally. In that respect, Fitch Ratings said it views the policy as a nationalistic move, which marks a shift in policy direction after years of allowing foreign banks to take control of local players. This was seen most recently with the acquisition of Bank of Ayudhya, the fifth-largest local bank, by Bank of Tokyo-Mitsubishi UFJ.
The incentives to merge include waivers on corporate income tax, value-added-tax, asset transference tax, revenue stamp duty, capital gains tax for shareholders, and special business tax.
Merger-related expenses would also be available for tax deductions at a rate depending on banks' assets post-merger - ranging from 1.25 times expenses for assets of Bt1-2 trillion to two times expenses for assets of more than Bt4 trillion.