Thai banks continue to face asset quality pressure stemming from vulnerabilities in the SME and unsecured retail loan sectors, and are exposed to risks in the highly indebted household sector, says Fitch Ratings. However, a slight pick-up in the economy and tighter underwriting standards should help reduce NPL (non-performing loans) growth by the end of the year.
Asset quality pressures were apparent in the 1H17 results, with the average impaired loan ratio of SET-listed banks rising from 3.5% in December 2016 to 3.7% in June 2017. Loan loss coverage also fell. These results were in line with our expectations and have reinforced our negative outlook on the sector and operating environment.
The NPL ratio is particularly high - and rising - in the SME sector, reaching 4.5% in 1Q17. This reflects the weaker resilience of small businesses to the challenging economic environment compared with larger firms. There are also signs of strain in the household sector, with the NPL ratio on housing loans rising from 2.9% in 4Q16 to 3.2% in 1Q17. Thailand's household debt is high, at close to 80% of GDP, and is a key source of risk for banks.
Economic growth muted by regional standards
Nevertheless, NPLs should peak by the end of the year. Fitch expects economic growth of 3.4% in 2017, which is muted by regional standards, but would be a slight improvement on 2016. Moreover, the 1H17 results showed a marked slowdown in loan growth, to just 1.8% ytd in June.
The Bank of Thailand (BoT) is considering plans to tighten lending standards on unsecured loans, but the slowdown in lending growth suggests banks have already become more cautious in their lending decisions. This should reduce asset quality issues in the coming quarters.
High provisioning costs continue, for now, to put downward pressure on bank profitability. However, net interest margins edged up in 1H17 and costs have been cut, softening the decline in banks' return on assets, which fell slightly to 1.30% from 1.34% in 1H16.
The Thai banking system generally maintains sound loss absorption buffers to weather headwinds. Profitability is likely to remain healthy enough to support reasonable internal capital generation. Key capital ratios have improved over recent years, due to retained profit accumulation, and are well above regulatory minimums.
All banks in Fitch's coverage are well-placed to meet the minimum Tier 1 capital requirement (including the conservation buffer) of 8.5% that will be applied from 2019, despite some potential negative effects on capital from the implementation of IFRS 9 accounting standards, which is expected in 2019.