The Thai banking sector remains remarkably resilient, with only a slight tightening of liquidity and interbank lending caused by the international financial meltdown. Both the central bank and commercial lenders remain upbeat about fundamentals and growth prospects.
On October 13, the Bank of Thailand (BOT) held meetings with domestic and foreign commercial banks to discuss the state of local financial markets, and the impact of the global financial crisis. The international banking sector has been hit in recent weeks by a number of bank failures, and several Western countries have stepped in to shore up banks through government share purchases, recapitalisation and deposit guarantees. Several countries in emerging markets, such as Pakistan, Hungary and Ukraine, are faced with spiralling costs of borrowing.
"We generally discussed the money markets to see whether and how demand for the dollar and overseas rate differentials would affect us," Thiti Tantikulanan, head of capital markets at Kasikornbank, one of Thailand's largest lenders, told local press after the meeting.
Thiti remains confident that Thailand has thus far not experienced the drying up of credit seen elsewhere in the world, stating that "our market is still working as usual".
The BOT concurs with this view, arguing that the Thai banking sector is still very liquid, despite a recent tightening, and that Thai lenders have little exposure to the toxic assets that have led American and European banks to declare large writedowns and in some cases, bankruptcy.
According to the BOT, liquid assets in the banking system totalled $32.85bn in August, down a touch from $33.14bn at the beginning of July and $33.40bn in early May. Interbank lending rates, meanwhile, have edged up slightly, with the benchmark Bangkok Interbank Offered Rate (BIBOR) at 3.82688% on October 14, up from 3.75000% on September 1. The one-year BIBOR rate, however, has climbed significantly to 4.17359% on Tuesday from around 3.70% at the beginning of June, though this may be a response to the expectation that the BOT would maintain its tight monetary stance and hike interest rates to head off inflation - which touched 8.9% in the year to the end of June. However, it fell to 6% in September, potentially giving the central bank scope to ease rates downward to head off the effects of a global growth and lending slowdown.
The BOT insists that the banking system has become less vulnerable to external shocks over the past decade. Total external debt owned by the banks fell to $7bn in July this year from $17.7bn in 1999. This is particularly significant as, during the Asian financial crisis of 1997, Thai banks were burdened by their foreign debt obligations. Meanwhile, the regulatory structure continues to be strengthened, and the central banks oversight role has the support of the private sector.
"The Thai banking sector looks sound with good capital ratios, great profits, and reasonably low NPL exposure," Willie Tham, CEO, HSBC Thailand, told OBG. "The BOT is very focused on improving governance, and they are supportive, flexible and dedicated to holding strong dialogue with the foreign participants."
Rags Raghavan, Managing Director and Chief Country Officer of Deutsche Bank Thailand, concurred. "Thailand's central bank policies are now much more transparent than most other Asian financial centres," he told OBG.
Furthermore, the growth outlook looks positive as domestic demand remains strong; "we are still putting 300-500bn baht [$8.8m to $14.7m] into the system every day and it has been at this level for the past two or three years," Pongpen Ruengvirayudh, the central bank's senior director for financial markets in Bangkok, told the international press.
"The local manufacturing sector and local suppliers hold great potential for growth of banking activities," Tham told OBG. "Thailand has traditionally been a strong destination for investment from the Middle East and therefore is in an excellent position to capitalise on the current economic windfall that the region has experienced," he added.
This growth is expected to offset most losses from those Thai banks which have exposure to bad foreign assets, such as Bangkok Bank, which is forecast to report a 22% fall in net profit in the third quarter due to investments in bonds issued by Lehman Brothers, the US investment bank which filed for bankruptcy in September.
However, Thai banks may have to raise more capital if they are to maintain their current expansion, and this could prove more difficult over the coming months. Loan growth was 9.7% compared to 4.8% for deposits in the first eight months of this year, according to Kasikornbank. With global lenders increasingly wary of investments not perceived as ultra-safe, Thai banks will need to continue to prove both that domestic growth prospects are good, and that corporate governance and regulatory oversight are strong. According to Raghavan, too many domestic banks have opted for universality, and run the risk of "doing nothing particularly well".
Overall, though, the message from the banking sector is: steady as she goes.