24.07.2015, 08:44
Fitch: Continued Asset Quality Weakening to Weigh on Thai Banks
OREANDA-NEWS. A persisting weak operational environment in Thailand suggests that loan impairments will continue to rise, weighing on banks' profitability through 2H15, says Fitch Ratings. Loan-loss reserve coverage and capital for the largest banks remain strong, however, and the system is generally well positioned to cope with ongoing macroeconomic weakness without a major ratings impact. Downside macro risks remain, though, and a sharper-than-expected downturn or recession could lead to a more rapid deterioration in key bank financial indicators. Fitch maintains a negative outlook on Thailand's banking sector.
Recently released preliminary financial data for the latest quarter highlight the ongoing operational challenges facing Thai banks. Slow regional and global growth has put a drag on exports and manufacturing while key domestic sentiment indicators - like consumer and industrial confidence - remain weak. High household debt is also constraining consumer spending and loan growth.
Results for the seven largest Thai banks, which account for 81% of market share in loans - Bangkok Bank, Siam Commercial, Kasikorn, Krung Thai, Bank of Ayudhya, TMB and Thanachart - show higher loan-impairment charges and NPLs through the first half of the year. The ratio of impaired loans to total gross loans for the seven banks had risen to 3% by end-1H15 from 2.8% at end-2014, while "special mention" loans (for the four banks reporting them) rose to 2.9% from 2.6% over the same period.
Worsening asset quality has affected profitability, with net income rising by only 1.5% yoy and return on assets declining marginally - to 1.5%, from 1.58% in 2014. Underlying loan growth was also low, at 1.1% in 1H15, reflecting the weak business environment and tightening bank credit standards.
But none of the seven banks showed any significant deterioration in capital, and separate data from the Bank of Thailand for the entire sector revealed that common equity Tier 1 capital has risen to 13.1% from 12.8% in December 2014. Loan-loss reserve coverage for the seven banks also remains robust at 138%, down only slightly from 142% at end-2014.
Fitch expects the soft business environment to continue through 2H15, and it is likely that impairments will continue to rise gradually. Banks' profitability should deteriorate further as a result.
That said, we maintain that the ratings of the aforementioned seven banks should not be affected even if the present macroeconomic conditions persist, considering the level of loan-loss reserve coverage and bank capital. Fitch forecasts Thai real GDP to expand at 3.5% this year but there are downside risks. Banks are likely to suffer a quick and substantial deterioration in performance should economic growth fall significantly short of our expectations.
Recently released preliminary financial data for the latest quarter highlight the ongoing operational challenges facing Thai banks. Slow regional and global growth has put a drag on exports and manufacturing while key domestic sentiment indicators - like consumer and industrial confidence - remain weak. High household debt is also constraining consumer spending and loan growth.
Results for the seven largest Thai banks, which account for 81% of market share in loans - Bangkok Bank, Siam Commercial, Kasikorn, Krung Thai, Bank of Ayudhya, TMB and Thanachart - show higher loan-impairment charges and NPLs through the first half of the year. The ratio of impaired loans to total gross loans for the seven banks had risen to 3% by end-1H15 from 2.8% at end-2014, while "special mention" loans (for the four banks reporting them) rose to 2.9% from 2.6% over the same period.
Worsening asset quality has affected profitability, with net income rising by only 1.5% yoy and return on assets declining marginally - to 1.5%, from 1.58% in 2014. Underlying loan growth was also low, at 1.1% in 1H15, reflecting the weak business environment and tightening bank credit standards.
But none of the seven banks showed any significant deterioration in capital, and separate data from the Bank of Thailand for the entire sector revealed that common equity Tier 1 capital has risen to 13.1% from 12.8% in December 2014. Loan-loss reserve coverage for the seven banks also remains robust at 138%, down only slightly from 142% at end-2014.
Fitch expects the soft business environment to continue through 2H15, and it is likely that impairments will continue to rise gradually. Banks' profitability should deteriorate further as a result.
That said, we maintain that the ratings of the aforementioned seven banks should not be affected even if the present macroeconomic conditions persist, considering the level of loan-loss reserve coverage and bank capital. Fitch forecasts Thai real GDP to expand at 3.5% this year but there are downside risks. Banks are likely to suffer a quick and substantial deterioration in performance should economic growth fall significantly short of our expectations.
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