Thailand: Building interest

Thailand's banking sector appears to have seen off the worst effects of the global recession and, far closer to home, long-running social unrest and seems to be gaining momentum as the country's economy begins to gather pace.

A recent report by international ratings agency Fitch said Thailand's banks were expected to perform soundly in the foreseeable future and continue to show resilience after the economic and political shocks of the past two years. However, the report, issued on July 6, said that while resilient, the Thai banking sector is still susceptible to political instability.

According to Vincent Milton, the managing director of Fitch Ratings Thailand, the heightened operating risks from prolonged political turmoil in Thailand and the still weak economic environment could impact profitability, loan growth and asset quality in the medium term.

"However, strong capital and liquidity should help at least the stronger banks to maintain overall performance in 2010," he said.

While Thailand's economic outlook for 2010 appears to be improving, with GDP tipped to increase by 3.8%, overall conditions are likely to remain weak, which the report warns could lead to an increase this year in the levels of non-performing loans.

Another note of caution sounded by Fitch was over asset quality, with the report saying that the disruption to businesses in the tourism, retail and consumer sectors resulting from the recent political unrest will ramp up pressure on such holdings.

The report also noted that while Thai banks posted a significant improvement in performance in the first quarter of the year, this could ease when second-quarter results were issued in late July.

However, the agency's forecasts for the Thai economy, and therefore for the banking sector, could be on the conservative side, with second-quarter results for the country's leading banks showing that growth trends are continuing. With Thailand's seven main banks having posted a 26.5% increase in profits for the first three months of the year over the first quarter of 2009, the industry stepped up the pace even further, with overall net profits rising by 27% in the second quarter. The second-quarter profit total of $870m took the sector's combined first-half net profits to $1.7bn, almost 26% up on first-half 2009.

The results exceeded expectations, Kim Eng Securities analyst Sukanya Udomvoranun told the Bangkok Post on July 26, the day after the data was released. Earnings for the second half will likely be better due to seasonal factors, industry restocking and a reduction in the burden on banks of loan-loss provisions based on asset quality in line with a better economy, she said.

Officials at the country's central bank seem to agree, with the Bank of Thailand (BoT) raising short-term interest rates for the first time since July 2008, a move it said was in keeping with the continued expansion of the economy. The BoT's Monetary Policy Committee (MPC) lifted the one-day repurchase rate from 1.25% to 1.5%, saying that the economic recovery had become more evident. "The economy should continue to grow, thus lessening the need for an exceptionally accommodative monetary policy," the MPC said in a statement.

This lifting of rates was intended as a pre-emptive strike against any rise in inflation brought on by growing domestic demand and higher levels of consumption, in part fuelled by easier access to credit from the country's liquidity-rich banks.

Thailand's banks are turning on the credit taps after restricted loan activity last year. The fifth-largest lender, Bank of Ayudhya, reported in late July that its loan portfolio had grown by 3.2% so far this year and that it was on track to meet its projected 8% increase in 2010. Market leader Bangkok Bank announced on July 27 that it had increased its loans by 2.6% in the first half.

On July 26, the BoT's assistant governor, Krirk Vanikkul, announced that local banks had stepped up loan issuance in May by 5%, with most of the credit facilities going to private consumers and large businesses. This increase in loan making would see Thailand's banks post net profits of more than $2.8bn this year, Krirk said.

With the BoT three days earlier having raised its growth projections for GDP from a low end of 4.3% to 5.8% in April to a far more robust 6.5% to 7.5% – well up on the more restrained Fitch estimate – Thailand's banks look set to meet or even exceed expectations.

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