Thai banks continue to face asset quality pressure stemming from vulnerabilities in the SME and unsecured retail loan sectors, and are exposed to risks in the highly indebted household sector, says Fitch Ratings.
However, a slight pick-up in the economy and tighter underwriting standards should help reduce non-performing loan (NPL) growth by the end of the year.
Asset quality pressures were apparent in the 2017 first half results, with the average impaired loan ratio of SET-listed banks rising from 3.5 per cent in December 2016 to 3.7 per cent in June 2017. Loan loss coverage also fell.
“These results were in line with our expectations and have reinforced our negative outlook on the sector and operating environment,” Fitch said in a statement.
The NPL ratio was particularly high – and rising – in the SME sector, reaching 4.5 per cent in the first quarter of this year.
“This reflects the weaker resilience of small businesses to the challenging economic environment compared with larger firms,” Fitch said.
There were also signs of strain in the household sector, with the NPL ratio on housing loans rising from 2.9 per cent in the fourth quarter last year to 3.2 per cent in the first quarter of this year.
“Thailand’s household debt is high, at close to 80 per cent of GDP, and is a key source of risk for banks,” the ratings agency said.
Nevertheless, NPLs should peak by the end of the year. Fitch expects economic growth of 3.4 per cent in 2017, which is muted by regional standards, but would be a slight improvement on 2016. Moreover, the first half results for 2017 showed a marked slowdown in loan growth, to just 1.8 per cent year-to-date in June.
“The Bank of Thailand (BoT) is considering plans to tighten lending standards on unsecured loans, but the slowdown in lending growth suggests banks have already become more cautious in their lending decisions,” Fitch said. “This should reduce asset quality issues in the coming quarters.”
It said that high provisioning costs continued, for now, to put downward pressure on bank profitability. However, net interest margins edged up in the first half of this year and costs have been cut, softening the decline in banks’ return on assets, which fell slightly to 1.30 per cent from 1.34 per cent in the first half of 2016.
“The Thai banking system generally maintains sound loss absorption buffers to weather headwinds,” Fitch said. “Profitability is likely to remain healthy enough to support reasonable internal capital generation.
“Key capital ratios have improved over recent years, due to retained profit accumulation, and are well above regulatory minimums.”
Fitch said that all banks in its coverage were well-placed to meet the minimum Tier 1 capital requirement (including the conservation buffer) of 8.5 per cent that will be applied from 2019, despite some potential negative effects on capital from the implementation of IFRS 9 accounting standards, which is expected in 2019.