A persistent weak operational environment in Thailand suggests loan impairments will continue to rise, weighing on banks’ profitability through the second half of this year, says Fitch Ratings.
However, loan-loss reserve coverage and capital remain strong at the largest banks, and the system is generally well positioned to cope with ongoing macroeconomic weakness without a major ratings impact.
But downside macro risks remain, and a sharper-than-expected downturn or recession could lead to a more rapid deterioration in key bank financial indicators, the international credit rating agency said.
Fitch maintains a negative outlook on Thailand’s banking sector.
Recently released preliminary data for the latest quarter highlighted the operational challenges facing Thai banks. Slow regional and global growth has put a drag on exports and manufacturing, while key domestic sentiment indicators such as consumer and industrial confidence remain weak. High household debt is also constraining consumer spending and loan growth.
Results for the seven largest banks, which account for 81% of market share in loans — Bangkok Bank, Siam Commercial Bank, Kasikornbank, Krungthai Bank, Bank of Ayudhya, TMB Bank and Thanachart Bank — showed higher loan-impairment charges and non-performing loans in the first half.
The ratio of impaired loans to gross loans for the seven banks had risen to 3% as of June 30 from 2.8% at the end of last year, while special mention loans for the four banks reporting them rose to 2.9% from 2.6%, Fitch said.
Worsening asset quality has affected profitability, with net revenue rising by only 1.5% year-on-year and return on assets declining marginally to 1.5% from 1.58% in 2014. Underlying loan growth was also low at 1.1%.
But none of the seven banks showed any significant deterioration in capital, and separate data from the Bank of Thailand for the entire sector revealed that Common Equity Tier 1 capital had risen to 13.1% from 12.8% last December.
Loan-loss reserve coverage for the seven banks also remained robust at 138%, down only slightly from 142% at the end of 2014.
Fitch expects impairments will continue to rise gradually as banks’ profitability deteriorates.
It predicts Thai real GDP will expand by 3.5% this year but that banks are likely to suffer a quick and substantial deterioration in performance should economic growth fall significantly short of the forecast.