Moody's Investors Service says the outlook on Thailand's banking system remains stable, as it has been since 2010.
"While economic growth has been slowing moderately, Thai banks are well positioned to withstand potential asset-quality challenges because of their strong capitalisation levels and increasing provisioning coverage," says Simon Chen, a Moody's Assistant Vice President and Analyst.
"In addition, we expect loans to grow at a more moderate rate, after four years of loan growth having outpaced deposit growth. The slower rate of loan growth will contain and even perhaps reverse the recent deterioration in the banks' loan-to-deposit ratios," adds Chen.
Moody's conclusions were published in its just-released "Thailand Banking System Outlook", which expresses Moody's expectation of how bank creditworthiness will evolve in this system over the next 12-18 months.
Banking system outlooks provide a forward-looking assessment of banking sectors against five broad categories of credit drivers: operating environment; asset quality and capital; funding and liquidity; profitability and efficiency; and system support. For the Thai banking system, Moody's assesses each category as stable.
In addition, Moody's report says that while the Thai banks' overall loan-to-deposit ratios will stay well below 100%, foreign currency loan-to-deposit ratios should, in contrast, remain elevated. Nonetheless, such loans represent only a fraction of the banks' loan books and the central bank's reserves.
However, according to Moody's report, the banks will face risks from: 1) household indebtedness, which has increased to 79% of GDP as of June from 64% in Q1 2011, and 2) rising property prices.
Moody's report says that while much of the lending on household debt has been by government-owned institutions outside the commercial banking system, rising household debt and property prices have increased the banks' vulnerability to adverse shocks.
Moody's points out that the banks' exposures to residential mortgages and other household loans comprised 35% of the banks' loan portfolios as of Q2 2013, up from 30% in 2009.
Nevertheless, the banks' capitalization levels remain above regulatory minimums under Moody's stress tests and will benefit from less rapid loan growth.
"We expect profitability in the overall system to remain much the same as current levels in the next 12 to 18 months, although the banks should face pressure on their net interest margins, given the intense competition in the industry," says Chen.
"At the same time, fee-based income is growing from increased investment sales, insurance products and other non-lending products to the growing middle class."
Moody's rates a total of 10 banks in Thailand, eight commercial banks and two policy banks. The eight commercial banks represented 89% of total commercial banking system assets at end-2012.