Despite the current resilience and strong financial buffers of Thai financial institutions, the country's banking sector will face a negative outlook if sluggish economic growth becomes prolonged, warns Fitch Ratings Inc.
Domestic financial institutions' immunity to Thailand's tepid economic conditions could deteriorate in the coming periods if the lethargic pace of growth is protracted, said Ambreesh Srivastava, Fitch's Singapore-based senior director and head of financial institutions for South and Southeast Asia.
He said since credit growth had expanded considerably in the past five or six years, a slowdown in the country's economic growth potential could trigger problems associated with bank loans.
Downward pressure has already built up in banks' loan portfolios in the SME and retail segments on the back of lacklustre economic figures, Mr Srivastava said.
There could be a spillover effect on bank lending to corporations even though no visible sign of deterioration can now be seen in corporate loans.
"It's very difficult to be definitive about what will happen two years from now, but our view on the [banking] sector is negative, because we've seen nothing positive happening," he said.
"The reason our ratings are still holding where they are is we believe that banks have built up considerable loan-loss reserves over the years, and they still have strong capital [buffers], so both these things will help them 'negotiate' problems they may encounter."
Mr Srivastava said higher non-performing loans (NPLs) and special mention loans were expected in the coming periods, but bad loans were not projected to record a significant upsurge.
NPLs of commercial banks increased to to 312 billion baht or 2.38% of outstanding at loans as of June 30 from 298 billion or 2.29% at the end of March, according to Bank of Thailand data.
Overall special mention loans, defined as 30-90 days overdue, fell to 2.72% with an outstanding registered value of 356 billion baht at the end of June from 2.81% or 366 billion three months before.
However, commercial banks' bad loans are expected to show an increase at the end of the third quarter due to the debt default of Sahaviriya Steel Industries' British subsidiary SSI UK Ltd.
A senior official at the Bank of Thailand recently said the NPL ratio would climb to 2.86% from 2.46% recorded in July if the steel maker's 53.3-billion-baht debt turned sour.
Mr Srivastava said SSI's debt had already been factored into the forecast for increased NPLs and Thailand's negative banking sector outlook since last year. Swelling household debt has also been factored in.
In a related development, Fitch has maintained Thailand's sovereign credit rating at BBB+ with a stable outlook for 12-18 months thanks to the country's strong external financial position compared with its regional peers, contributing to a lesser exposure of financial volatility generated from the US Federal Reserve's looming rate hike, said Andrew Colquhoun, Fitch's Hong-Kong-based head of Asia-Pacific sovereigns.
Meanwhile, Deputy Prime Minister Somkid Jatusripitak yesterday said economic growth was likely to pick up in next year's first quarter thanks to the government's new stimulus package and recovering exports.
He expects the economies of major trade partners such as the US and the EU will also recover next year.
At the same time, the Commerce Ministry is restructuring its export promotion plans to focus on promising markets such as Asean, the Middle East and China along with major cities worldwide.