OREANDA-NEWS. The largest Thai corporate default since the aftermath of the 1997 financial crisis will lead to more non-performing loans (NPLs) in the Thai banking system and reflects risks to banks' performance from the weak operating environment, Fitch Ratings says.

However, the impact of the default by a subsidiary of Sahaviriya Steel Industries Public Company Limited (SSI) on banks' asset quality is not out of line with previous expectations for the sector, and does not necessarily point to further sharp deterioration in the next several quarters.

SSI, one of Thailand's largest steel manufacturers, at the end of September said it would shut steel-making operations at its United Kingdom subsidiary and enter into financial restructuring talks with creditors. The events led banks that extended loans to the SSI group to classify them as non-performing. This has particularly impacted two large Thai banks: Siam Commercial Bank Public Company Limited (SCB; BBB+/Stable) and Krung Thai Bank Public Company Limited (KTB; BBB/Stable), each of which has exposure of around THB22bn to the SSI group.

While this increase in NPLs is sizeable, both banks' capital and reserve coverage buffers remain within reasonable ranges for their current ratings. In addition, SCB will book extraordinary investment gains in 3Q15 (including the sale of a stake in Siam Cement Public Company Limited) of around THB7bn-8bn that will significantly moderate the impact of the additional provisioning of around THB10bn-11bn related to SSI. KTB's Issuer Default Rating is driven by sovereign support factors arising from its status as the only state-owned commercial bank - such factors are unaffected by the SSI group's default.

Large Thai corporates have increasingly engaged in foreign acquisitions over the past five years, which expose them and their banks to risks to which they are unaccustomed. However Fitch believes that the SSI case is sufficiently distinctive (in terms of business sector, geography, and borrower group) that it does not have wider implications for asset quality across the Thai large-corporate sector.

Fitch had factored into its ratings some deterioration in banks' asset quality this year due to the weak operating environment. We continue to expect further gradual deterioration in asset quality, and rising banking sector NPLs, over the next 6-12 months. The segment that faces the most downside risk is Thai SMEs, which are vulnerable to the economic downturn and muted business sentiment.

Thai banks rated by Fitch have generally posted sound performance over the past several years, during which they have been able to improve their leverage and build up counter-cyclical general provisions. This is reflected in the Stable Outlooks on the banks currently under our coverage.