Despite PM's Ouster, Thailand's Banking System Remains Stable

Moody's Investors Service says that the outlook for Thailand's banking system remains stable, as it has been since 2010, reflecting stable liquidity and funding conditions and the banks' ability to withstand the expected moderate increase in non-performing loans over the next 12-18 months.


"While political tensions in the country have caused economic growth to slow since 2013, dampening consumption and delaying investments, we expect only a moderate deterioration in the banks' asset quality profiles; in particular, in their retail and small- and medium-size enterprise segments," says Alka Anbarasu, a Moody's Assistant Vice President and Analyst.


On 7 May, the country's Constitutional Court ordered caretaker Prime Minister Yingluck Shinawatra and nine of her cabiner members to step down for what it deemed were unconstitutional acts in 2011. The ruling threatens to prolong Thailand's political crisis, which has lasted for six months.


But for now, Moody's considers Thai banks to be well positioned to withstand the expected moderate increase in non-performing loans over the next 12-18 months, owing to the strong loss absorbing buffers they have built up, in response to the regulator's moves to encourage them to establish countercyclical provisions and strong capitalisation levels.


The rating agency's "Thailand Banking System Outlook" report says that the political impasse in Thailand has limited the government's ability to disburse planned funds for infrastructure development, and investor confidence in the economy will likely be eroded if the current political deadlock continues over a prolonged period or if political violence escalates.


On the banks' asset quality, Moody's report says while loans to retail borrowers and small- and medium-size (SME) enterprises will likely demonstrate worsening asset quality, this trend should be partially offset by the resilience of loans to large corporate borrowers.


The Moody's report points out that in the retail segment, for instance, the expansion in consumer credit in recent years, supported by political incentives, has stretched the ability of borrowers to service their debt. Moreover, the SME segment is most vulnerable to changing economic conditions and liquidity challenges, as the banks have tightened their underwriting standards and limited credit flows.


On liquidity and funding, Moody's report says Thai banks are largely funded through stable local deposits, with limited reliance on interbank funding and debt. Moreover, the banks' liquid assets provide a buffer against any sudden deposit outflows, such as those motivated by political concerns.


As for profitability, Moody's report says the banks' profitability levels will decline over the next 12-18 months from strong growth levels over the last three years.


"Nonetheless, their profitability profiles should support capital generation and absorb credit costs," says Anbarasu.


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