Thai banks' asset quality will prove stable due to the broad economic recovery, but some weaknesses will persist, with stress among small and medium-sized enterprises (SMEs) a key risk, says Moody's Investors Service.
"In fact, a sign of stress among smaller businesses is their accelerating growth in restructured loans," the international credit rating agency said in its latest report, "Banking System Outlook -- Thailand: Economic improvements and strong loss buffers support stable outlook".
Moody's outlook for the Thai banking system over the next 12-18 months is stable, reflecting a gradually improving operating environment and banks' strong capitalisation and loan loss reserves.
"We estimate that credit will grow 4-5% system-wide in 2017, moderately faster than the 3.2% in 2016," said Alka Anbarasu, a Moody's vice-president and senior analyst.
"On the other hand, weak private sector investment, political uncertainty and a high level of household leverage will continue to constrain growth potential for the broader economy as a whole, and the banking sector in particular," she said.
As for Moody's assessment of the banks' strong capitalisation and loan loss reserve coverage, the credit rating agency said that the average common equity Tier 1 ratio of Moody's-rated commercial banks in Thailand (Baa1 stable) rose to 14.5% in 2016 from 13.9% in 2015.
Meanwhile, their non-performing loan coverage ratio climbed to a healthy 135% at the end of 2016 from 132% a year earlier.
Moody's said that these buffers will further strengthen because of banks' ability to generate capital internally and good credit growth.
The stable outlook is based on Moody's assessment of five drivers: Operating environment (stable), asset quality and capital (stable/improving), funding and liquidity (stable); profitability and efficiency (stable); and government support (stable).
On the operating environment, Moody's said that the environment will gradually improve, with fiscal spending underpinning economic growth.
Moody's expects that Thailand's real GDP growth will accelerate slightly to 3.4% in 2017 from 3.2% in 2016, helped by the government's infrastructure investment plans.
Moody's said that the banks' liquidity levels will remain sufficient.
While Moody's expects that the banks will maintain their loan-to-deposit ratios at a high of 95-98% -- as they have over the past two years -- the banks have sufficient liquid assets to cope with any sudden deposit flight.
Profitability will stay stable, because credit costs -- while high -- will hold steady. In particular, while banks' credit costs will remain higher than historical averages because of their tendency to proactively provision for problem loans and also due to preparations for the local implementation of IFRS 9 in 2019, such costs will not rise by much. As such, returns on assets of rated commercial banks in Thailand will remain at 2016 levels.
On the issue of systemic support, Moody's says that government support will remain strong, with an unlikely near-term adoption of a bail-in regime.
Moody's rates nine commercial banks and three policy banks in Thailand. The nine commercial banks accounted for 85% of commercial bank assets in the country at end of 2016. The three policy banks -- Export-Import Bank of Thailand (Baa1 stable), GH Bank (Baa1 stable, ba3) and Small and Medium Enterprise Development Bank of Thailand (Baa2 stable, b3) -- are classified as specialised financial institutions. Moody's has maintained a stable outlook on the Thai banking system since 2010.