Friendly Monetary Policies, Better Operating Conditions Make Thai Banks Resilient

The overall credit profiles of Thai banks will remain stable in the coming quarters as an improvement in operating conditions coupled with accommodative fiscal and monetary policies will boost loan growth and support asset quality, according to a Moody's Investors Service report.

Moody's expects credit growth in Thailand (Baa1 stable) to accelerate in 2H 2014, coming in at around 5%-7% on a full-year basis.

"Credit growth will likely accelerate more quickly for banks focused on corporate and small- and medium-sized enterprise borrowers, compared to retail-focused banks," says Daphne Cheng, a Moody's Associate Analyst and a co-author of the report.

Alka Anbarasu, a Moody's Assistant Vice President and Analyst, and co-author of the report, notes that the banks' reported asset-quality metrics will likely continue to show some deterioration, reflecting in part the lagged effects of the earlier turmoil, with assets related to retail and small and medium-sized enterprise borrowers as the most vulnerable.

"Though we expect the extent of the deterioration to be relatively modest and within the banks' capacity to manage," notes Anbarasu.

Since taking power, the military government has increased outlays for investment and infrastructure projects that were previously delayed. In addition, the approval on 19 August of the draft budget for 2015 has provided clarity on spending for the year ahead.

For loans to small- and medium-sized enterprises, the Thai Credit Guarantee Corporation is planning to increase the volume of loans that it guarantees and to broaden the scope of assets that are eligible as collateral.

"Reported asset-quality metrics will deteriorate moderately for the rest of the year, reflecting the time lag until loans affected by the political turmoil in 1H 2014 become classified as nonperforming loans (NPLs)," adds Cheng.

However, Moody's expects that underlying asset quality will remain broadly stable for large corporate loans.

In contrast, high levels of indebtedness mean that it will take longer for underlying asset quality to stabilize in the retail segment, affecting some small-and medium sized enterprises as well.

Moody's notes that the leading indicators of banks' asset quality -- the retail sales index, manufacturing capacity utilization, exports of goods and the SET index -- suggest stability for large corporate borrowers and some weakness in retail loans over the next few quarters.

Thai banks continue to have strong loss-absorbing buffers, supported by stable profitability and capital generation capacity.

The average Tier 1 ratio of Moody's-rated Thai banks was 11.6% at 30 June 2014, with loan-loss allowances covering 138% of NPLs. Pre-provision profitability will remain sufficiently strong to absorb higher credit costs and support capital generation.

"We also expect banks will selectively tap the capital markets to replace their Tier 2 subordinated bonds with Basel III compliant instruments so that they have capital to capture loan growth as economic activity picks up," adds Anbarasu.


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