Thailand’s non-performing loans (NPLs) in the banking industry are likely to surpass 3% next year, as foreshadowed by the gloomy economy and fragile recovery, says Fitch Ratings Inc.
Fitch Ratings warns the poor economy threatens to boost banks’ NPLs past 3% of overall loans next year, with automobile hire-purchase the main culprit, particularly used cars. Pattarapong Chatpattarasill
The credit rating agency based its forecast on bad debts in the sector increasing steadily all this year and standing at 2.6% of overall loans as of Sept 30.
The higher NPL level is a result of the economic slowdown and swelling household debt.
“It will take time, say one or two quarters, for the sluggish economy to begin to affect business operations and raise NPLs,” Fitch Thailand senior director Parson Singha said.
Automobile hire-purchase is the main area driving up NPLs, stemming partly from the first-time car buyer scheme that ended two years ago.
The Yingluck Shinawatra government offered a full excise tax rebate that created artificial demand at the time.
“That resulted in a rise in distressed debts from automobile loans,” Mr Singha said.
“In particular, those in the used-car segment have continued to increase from last year, and this negative sign is expected to continue next year.”
Under this scenario, Fitch Ratings forecasts lower profitability for banking industry next year, particularly small and medium-sized banks.
This anticipation has prompted Fitch to give a negative outlook to the sector.
But the rating agency is maintaining a stable outlook for the Thai banking industry’s credit rating.
That outlook is supported mainly by the overall industry’s strong buffers, particularly a solid capital base and loan-loss reserves, given that the overall industry’s capital adequacy ratio is 16-17%, much higher than the central bank’s requirement of 8.5%.
Its overall tier-one capital base is high at 12-13% compared with the regulatory requirement of 4.5% under the Basel III, while the coverage ratio has increased continuously to the present level of 130%.
“The high capital will help to protect the banking system against downside risks,” Mr Singha said.
“At the same time, the capital base could improve further this year compared with last year due to profit accumulation and low asset growth.”
Loan growth in the banking industry is expected at 5-10% next year.
Mr Singha said the wide range depended on the level of banking expansion during each cycle.
Fitch forecasts more business activity in the second half of next year, in line with clearer economic circumstances.
The rating agency predicts GDP growth of 3.5% to 4% in 2015, with the economy the main challenge affecting banking operations.