After two years of rapid growth in lending to the private sector, Thai banks started 2013 faced with slowing growth and by building their counter-cyclical buffers. While the compound annual growth rate (CAGR) in loans and deposits averaged 3.25% and 5.84%, respectively, in the 15 years to 2012, according to Deloitte, loan growth jumped to 13.7% in 2012 buoyed by post-flood reconstruction and government policies to boost domestic consumption. Total assets of BT16.03trn ($524.2bn) and a pool of 83.5m accounts in January 2014, according to figures from the Bank of Thailand (BOT), reflect the maturing profile of the banking sector. The well-capitalised and liquid sector remains dominated by Thai lenders, although foreign banks’ share of assets rose from 19% to 26% following the biggest acquisition in Thai banking history (see analysis). With strong fee-revenue growth offsetting pressure on net interest margins, the outlook for Thai lenders remains positive despite an uptick in loan delinquencies.

Rising Household Debt

Thai banks’ lending has grown roughly three times faster than nominal GDP since 2010. In the decade to 2013 banking loans grew 11.6% annually, outstripping nominal GDP growth of 7.5% per year, according to Maybank. Having grown 17% in the two years from 2010, outstanding loans rose 12.8% to BT10.17trn ($332.6bn) in the year to June 2013, while deposits grew 16.4% to BT10.37trn ($339.1bn) in the same time span, according to BOT data. This relatively faster deposit growth caused the sector’s loans-to-deposit ratio (LDR) to slump from a peak of 107.8% in 2011 to 96.4% in 2012 and 98.1% by the second quarter of 2013, according to central bank data.

Figures released by the BOT in July 2013 showed rapid growth in household debt, which rose from 56% of GDP in 2007 to 77% in 2012 – Asia’s third-highest behind South Korea’s 91% and Malaysia’s 81% but ahead of Singapore’s 76% and Indonesia’s 10%, according to Siam Commercial Bank (SCB). The bank estimated in April 2013 that the average debt-servicing ratio had risen from 30% in 2011 to 34% by end-2012, with a ratio twice as high at 62% for households earning less than BT10,000 ($327) monthly.

While Thailand’s share of dual-income earning households, which, at 68%, is the world’s highest according to the International Labour Organisation, is greater than Malaysia’s 30% and although the aggregate household figure includes an unspecified share of lending to self-employed entrepreneurs, the accelerating growth trend has caused concern for the central bank. Consumer lending, which constituted 30.1% of bank lending in the second quarter of 2013, has been the key driver in this loan growth given relatively stable corporate leverage: household debt extended by credit card, leasing and personal loan lenders expanded 27% a year since 2010, while personal credit from banks grew at 17%, according to figures from SCB. By comparison, growth in corporate loans, which accounted for 69.9% of total loans as of the second quarter of 2013, averaged just 10.1% year-on-year (y-o-y) since the floods, driven primarily by construction-related loans, compared to 14.8% in the year to quarter four of 2011, according to figures from Capital Nomura Securities (CNS).

“There has been a deleveraging of Thai corporates since the 1997-98 crisis,” James Moss, ASEAN banks analyst at CNS, told OBG. Yet several analysts expect corporate lending growth to rebound to double-digits in 2014 (as high as 15%, according to CNS), compensating somewhat for the slowdown in consumer lending.

Consumer Lending

Although reconstruction after the worst floods in 70 years in 2011 contributed to credit growth in 2012, government policies since 2011 were key drivers of the 21.6% expansion in consumer lending in 2012, the fastest pace in seven years. The progressive daily minimum wage raise to BT300 ($9.80) in the two years to April 2013 supported rising leverage levels as borrowers anticipated the hike. Meanwhile, the excise tax refund on first-time vehicle purchases in the year to December 2012 prompted an 82.6% rise in passenger car sales that year to 1.43m cars, with vehicle financing accounting for some 8% of total bank lending, according to Standard & Poor’s. “The impact of the first-time car buyer policy was felt until April 2013 since it covered car deliveries up to the first quarter of 2013,” Monchai Jaturanpinyo, vice-president of research at CIMB Securities (Thailand), said. While the scheme generated high new-car sales volumes, it affected used car rates and defaulting levels on used-car loans. “Through the first-time car tax rebate scheme the government unintentionally created problems in the used car market,” Deepali Seth-Chhabria, a Mumbai-based analyst at S&P’s, told OBG. “The supply of used cars increased as demand shifted towards new cars, prompting used car prices to drop and delinquencies to rise.”

Despite tax deductions of up to 10% on first-time purchases of homes up to BT5m ($163,500) in value, the stimulus to mortgage lending remained limited with more modest 11.4% growth in 2012. “The effect of the government’s first-time house purchase policy was very limited given a similar programme in 2009: you generally only buy a home once,” Peach Patharavanakul, research analyst at Deutsche TISCO Investment Advisory, told OBG. Although a majority of home purchases are mortgage-backed (some 95% in Bangkok), banks have become increasingly cautious in the face of potential over-heating, particularly in the higher-end housing segments. “While mortgage lending continued to grow in 2013, banks are much more cautious in financing second and third home purchases,” Narumol Charnchanavivat, assistant vice-president of research at DBS Vickers Securities (Thailand), told OBG.

A second driver behind the growth in recorded household debt has been the formalisation of more than 1m loan-shark borrowers since 2009 and expansion in eight state-owned banks’ (so-called specialised financial institutions, SFIs) balance sheets. “Rising aggregate household debt is due to the higher leverage of households but also more individuals participating in the financial sector,” CIMB’s Monchai told OBG. “It is difficult to discern between the two, although the trend of debt outpacing income growth since 2009 is clear.”

Fee-Driven Profit

Growing competition among major banks has placed downward pressure on banks’ net interest margins (NIMs) over the past five years and prompted lenders to diversify profit drivers and expand fee-based revenue. “Banks have sought to diversify away from their reliance on NIMs, which still accounted for 54% of their profit in 2012,” Sasikorn Charoensuwan, senior vice-president of research at Phillip Securities (Thailand), said. “By integrating their non-bank operations these lenders are driving high fee-revenue growth.” Also, by increasingly cross-selling products from their non-bank subsidiaries, banks have generated higher non-interest income, driven primarily by fees linked to loans, bancassurance sales and transaction banking fees. In addition, domestic lenders have launched new fee-generating services such as cash management for small and medium-sized enterprises (SMEs) in recent years. These relatively new profit centres supported a strong rebound in banking sector profit after the 2011 floods, with net profit growing from BT143.5bn ($4.69bn) in 2011 to BT173.8bn ($5.68bn) in 2012, exceeding its 2010 levels. “Pressure on banks’ NIMs stems from funding costs and competition, rather than on interest rates themselves,” DBS’s Narumol told OBG. “Banks have moved into higher-yielding retail and SME lending, while double-digit fee-revenue growth has driven profitability.”

Net interest margins trended downward from 3.07% in 2012 to 2.53% in the second quarter of 2013, according to BOT data, prompted by higher competition for deposits (major Thai lenders raised their deposit rates by an average of 50 basis points to 3.25% in August 2013) and downward pressure on lower-yielding corporate lending and slowing retail and SME loan growth.

“Fee income continues to drive banks’ profitability with 20% y-o-y growth in the first half of 2013,” CIMB’s Monchai told OBG. “The biggest contributor to fees is bancassurance and we expect fee-income growth to continue to outpace lending.” Although lower than record-breaking Indonesian banks’ 3% annual return-on-assets (ROA), Thai banks remain profitable with a stable ROA of 1.25% (despite a spike to 1.4% in the first quarter of 2013 due to a decline in loan loss provisioning) and return-on-equity (ROE) of 10.3% in the first quarter of 2013. Two banks recorded ROE of above 20% in the first half of 2013: KasikornBank (KB ank) and SCB. Thai lenders’ efficiency (cost-to-income) ratios are trending downwards, with CIMB forecasting a drop from 46.2% in 2012 to 42.5% in 2013, as banks work to control costs and as fees drive income growth. Supported by the BOT, lenders have invested in automating loan-approval processing. Lenders have also shifted towards leasing space in shopping malls for new branches and increasing the number of services offered through ATMs rather than building standalone footprints, thereby reducing fixed-asset costs. “Banks’ cost-to-income ratios are trending downwards as the focus shifts away from building and owning standalone branches towards upgrading IT systems and introducing more automation,” Somchai Lertlarpwasin, an executive at the BOT’s financial institutions monitoring and analysis department, told OBG.

Cautious Oversight

Chastened by memories of the 1997-98 crisis the BOT has maintained a conservative macro-prudential stance. By implementing its Financial Sector Master Plan (FSMP) over the past decade, the bank has first moved to consolidate the sector and improve risk management. In the FSMP’s second phase to 2014, the BOT is introducing more competition from foreign lenders, encouraging reductions in costs and strengthening its group supervision (see analysis). “We have moved from a pure focus on risk management towards backward-integrated oversight. We identify a bank’s main area of activity and then examine its risk management processes,” the BOT’s Somchai told OBG. The apex bank also implemented Basel III capital standards from January 2013, requiring Tier-1 capital ratios of 8.5% and a minimum capital adequacy ratio (CAR) of 11%. The rules’ impact has been muted on lenders, however, given average CAR of 15.7% and Tier-1 capital ratios of 12.3% in the second quarter of 2013.

While Thai banks remain highly capitalised, the BOT has encouraged lenders to build counter-cyclical buffers in the form of loan-loss provisions since 2012 to guard against an expected upsurge in non-performing loans (NPLs) stemming from the end of key government schemes and high household debt. The BOT has also tightened loans-to-value caps on mortgages to 90% for condominiums and 95% for landed houses below BT10m ($327,000), charging a risk-weighted capital charge of 75% for loans exceeding these caps (compared to the normal 35%). The bank also requires credit card clients to earn over BT15,000 ($491) monthly, with a cap on lending at five times monthly salary.

The BOT started levying a deposit insurance fee on banks’ deposits from the second quarter of 2012 following the transfer from the Finance Ministry to the bank of the BT1.4trn ($45.8bn) Financial Institutions Development Fund (FIDF) liability, stemming from post-1997 bank crisis resolutions. This FIDF levy of 0.46% on deposits will be used to reimburse the FIDF’s principle, while the BOT will gradually reduce the level of deposit guarantee from BT50m ($1.6m) currently to BT25m ($817,500) in August 2015 and BT1m ($32,700) from August 2016 onwards. With 98% of bank accounts holding balances below BT1m ($32,700) according to the BOT, the guarantee ceiling’s reduction will spur only limited deposit outflows towards more aggressive investments. The FIDF levy, however, caused the unwinding of the market for bills of exchange (BEs), quasi-deposit instruments commercial banks used to face state-owned banks’ competition on deposit rates. “The ‘FIDF levy’ has reduced the attractiveness of BEs and spurred rising deposits,” the BOT’s Somchai told OBG. Although state banks were exempted from the levy, the Finance Ministry intends to extend it to these banks it oversees.

Market Leaders

Although the banking sector is open to majority acquisitions by foreign investors on the finance minister’s approval, Thai-owned lenders dominated the market until 2013 when Japan’s largest lender by assets, Mitsubishi UFJ Financial Group (MUFG) acquired a 72% stake in Thailand’s fifth-largest lender by assets, Bank of Ayudhya (BAY, see analysis).

Of the 14 domestic banks, 15 foreign bank branches and one foreign bank subsidiary, foreign banks accounted for only 19% of total assets in 2012. This increased to 26% following the BAY acquisition. Four Thai-owned banks dominate with a combined 59% share of banking assets and 65% of deposits, according to BOT data, while three mid-sized and seven smaller lenders specialise in market niches such as auto-finance. While domestic banks are barred from engaging in investment banking, securities brokerage, asset management and non-bank businesses such as insurance directly, most maintain dedicated subsidiaries.

Bangkok Bank

Founded in 1944 and still majority-owned by the Thai-Chinese Sophonphanich family as the first regional lender to South-east Asia’ ethnic-Chinese communities, Bangkok Bank (BBL) is Thailand’s largest bank with assets of BT2.48trn ($81.2bn) in the second quarter of 2013. BBL leads in the corporate lending segment although it expects its lead to be eroded by MUFG’s acquisition of BAY. With 1100 branches domestically and 26 overseas offices in 13 countries, it is also the most internationalised of Thai lenders. While overseas lending accounted for around 20% of its loan book in 2012, the bank froze bank-lending growth in China from mid-2012 onwards, according to DBS research. While BBL’s profitability remains lower than more retail-focused SCB and KB ank with a 1.5% ROA in 2012, backed by a lower net-interest margin of 2.48% and timid 3.1% non-interest income growth, its net profit still grew 13.1% y-o-y in the first half of 2013 to BT2.24bn ($73.2m). More conservative than its peers, BBL maintained the big four’s lowest LDR at 87.5% with 9.1% loan growth in 2012 and the highest Tier-1 capital ratio at 11.9% by end-2012, while it has improved its efficiency by curbing its cost-to-income ratio from 44.3% in 2012 to 37.8% in the first half of 2013. Despite a small increase in its NPL ratio from 2.3% at end-2012 to 2.4% in the second quarter of 2013, it was still targeting loan growth of 6-7% in 2013 based on a pickup in corporate and government investment.

KRUNG THAI: The second-largest bank, Krung Thai Bank (KTB), with BT2.361trn ($77.2bn) in assets in the second quarter of 2013, was formed by the merger of 13 failing banks and finance companies following the 1997-98 Asian financial crisis. The bank, which is now 55.3%-owned by the Finance Ministry through the FIDF, holds an edge on government business and public employees. The roughly 30% of its loan book in retail loans is concentrated among state employees, but the bank has recently been expanding its private corporate loan book. The bank expanded its branch network from 1028 in 2012 to 1200 by end-2013, while it also operates branches in seven overseas markets. Despite recording the lowest ROA of the big four at 1.1% in 2012, KTB has significantly improved its ROE from 13.1% in 2011 to 15.6% in 2012, supported by net interest margins of 2.93% and record fee growth of 21.9% in 2012.

Meanwhile, KTB’s Tier-1 capital ratio improved markedly from 8.7% to 10.2% in the same span, although it is still the lowest within the top tier. Relatively slow loan growth of 7.2% in 2012 allowed the bank to reduce its LDR from 111% in 2011 to 91.7% in 2012. Having restructured and sold off a large share of its legacy NPLs from the 1997 crisis, KTB gradually reduced its NPL ratio to 4.2% in 2012 and 2.95% by the end of second half of 2013. Despite gross profit growth of 10.2% yo-y in the second quarter of 2013, the bank has raised its loan-loss provisions over the past year, reducing its net profit but increasing its coverage ratio from 92.73% in 2012 to 104.36% in the first half of 2013.

Siam Commercial Bank

SCB, the market’s third-largest with assets of BT2.308trn ($75.5bn) in the second quarter of 2013, was established in 1907 by Royal Charter and counts the Crown Property Bureau and the Finance Ministry (through its Vayupak Mutual Fund) as key shareholders, with 23.69% and 23.12% stakes, respectively. With the largest network footprint of nearly 1200 branches – alongside branches and offices in five ASEAN markets and Hong Kong – SCB is one of the two retail-focused banks among the big four. Since 2010 it has increasingly focused on expanding its SME and retail lending. Although it contained its LDR from 109.2% in 2011 to 95.9% in 2012, its lending growth reached 19.7% in 2012 alone. By early 2013 SCB was the leading bank in retail lending, which accounted for 38% of its book, according to Maybank research. Although its Tier-1 capital ratio fell from 11.1% to 10.9% in the same span, it achieved a high ROA of 1.9% in 2012 backed by the top-tier’s second-largest net-interest margins of 3.17% and a healthy cost-to-income ratio of 41.2%. SCB’s net profit rose a record 27.8% y-o-y in the first half of 2013 to BT26.04bn ($851.4m). While SCB has contained its NPL ratio from 2.8% in 2011 to 2.3% in 2012, its credit expansion will likely bring higher delinquencies in coming years. “SCB has been the most aggressive bank of the big four, and we would expect this to lead to a higher rise in NPLs than for others in the coming year,” Deutsche TISCO’s Peach said.


Created in 1945 by the Lamsam family, still the controlling shareholder, KB ank is the fourth-largest with assets of BT2.225trn ($72.8bn) in the second quarter of 2013. With 897 branches at the end of 2012 and 10 overseas branches in China, Hong Kong, Japan, the US and Cayman, KB ank was the first commercial bank to target SME lending in particular, moving down towards smaller SMEs from 2012. “As other banks like SCB started targeting the larger SME market over the past two years, KB ank has reacted by moving up the yield curve and lending to smaller and micro-SMEs,” Deutsche TISCO’s Peach told OBG.

The second-largest retail-focused bank with 26% of its lending to individuals, KB ank slowed lending in 2012 with 9.6% annual growth, improving its LDR from 97.5% in 2011 to 95.4% in 2012. By contrast, some 38% of its loans were to SMEs in 2012, compared to SCB’s 30%, supporting net-interest margins of 3.58%. Strong non-interest income growth of 19.7% in 2012 was driven by strong credit fee growth and cross-selling of non-bank products, leading to a reduction in KB ank’s cost-to-income ratio from 45% in 2012 to 41.5% in the second quarter of 2013. The bank’s earnings rose 15% y-o-y in the first half of 2013 to BT21.1bn ($690m), while its ROA rose from 1.9% in 2012 to 1.96% in the first half of 2013 and a leading ROE of 21.9%. The lender has controlled its NPL ratio, which dropped from 2.4% in 2012 to 2.13% by the end of the first half of 2013, although it has built a loan-loss coverage ratio of 133.9% to guard against any uptick. KB ank has also rebuilt its Tier-1 capital ratios, which rose from a low of 9% in 2010 to 11.44% in the first half of 2013.


A mid-sized tier of three key lenders has emerged focused on retail and SME lending in particular. BAY, the fifth-largest lender by assets in 2013 with a lead in used-car financing and second after Thanachart in vehicle lending, is the key mid-sized bank to watch in coming years following the MUFG acquisition as it expands from its retail focus to the larger corporate market. Thanachart Bank, 49% controlled by Canada’s Bank of Nova Scotia, has incorporated its acquisition of the privatised Siam City Bank in 2010 and sold off some non-bank businesses like one of its life insurance subsidiaries. Both lenders have used part of their earnings since 2012 to build their counter-cyclical buffers to handle rising NPLs in the vehicle segment in particular. Thai Military Bank (TMB), 31% owned by ING Group, has been sanitising its loan book since 2010 and improving its financial position, ahead of an expected sale by ING (see analysis). Alongside four hybrid banks majority-controlled by foreign investors and focused on urban retail markets, niches in cross-border trade and investment and capital markets, a segment of smaller lenders has emerged in niche segments. TISCO Bank has focused on upper-middle class retail clients and key segments such as vehicle financing in recent years, alongside its traditional edge in capital markets through its TISCO Financial Group holding company. Kiatnakin Bank, a small competitor, merged with Phatra Financial Group in 2012 to diversify away from its traditional focus in auto lending and distressed assets restructuring in order to drive higher non-interest income through Phatra’s strong capital markets franchise. LH Bank, established by leading property developer Land & Houses as a retail bank in 2011, is focusing on its core strengths in mortgage lending.

State-Owned Institutions

The importance of Thailand’s eight state-owned SFIs has grown significantly in the past five years beyond their traditional roles of extending access to unbanked segments. The largest are the Government Savings Bank (GSB), Government Housing Bank (GHB) and Bank for Agriculture and Agricultural Cooperatives (BAAC), although the Islamic Bank of Thailand also provides micro-finance services primarily to the country’s Muslim population. Although SFIs report lending figures to the central bank, they are only regulated by the Finance Ministry and are exempt from BOT capital adequacy and liquidity requirements.

“With total household debt at roughly BT8.82trn ($288.4bn), but commercial banks’ lending at around BT3.8trn ($124.3bn), we have a situation where although total household debt to GDP is 77%, the BOT only truly oversees half of this,” Montree Sornpaisarn, the CEO of Maybank Kim Eng Securities, said. In particular, GSB, which focuses on promoting domestic savings and lending to low-income earners and civil servants, has seen its balance sheet mushroom since 2009 to account for 14% of total bank assets by 2013, higher than KTB’s, according to BOT data, while GHB accounted for a majority of the BT2trn ($65.4bn) in SFI-held household debt reported in June 2013. The BAAC, meanwhile, is in charge of the rice-subsidy scheme with a dedicated annual rolling fund of BT400bn ($13.1bn) and policies targeting rural workers such as the 2m farmer credit-card scheme. Competition from GSB in particular has pushed up deposit rates for commercial banks with spreads of 0.4% or more above commercial rates. By the second quarter of 2013 the eight SFIs and KTB accounted for BT6.71trn ($219.4bn) in outstanding loans, with an aggregate NPL ratio of 3.71%. Yet as some policy banks have witnessed surges in their NPL ratios to as high as 30% (in the cases of SME Bank and GSB), the government intends to reform their duties to focus on their core functions and improve their solvency ratios. “Although SFIs do not yet represent a systemic problem, the government has sought to curb their lending growth over the past year,” Monchai said. In September 2013 the Fiscal Policy Office forwarded proposals to the finance minister to require SFIs to comply with BOT macro-prudential regulations and reduce lending that competes with commercial banks.


Despite a needed cooling of loan growth in 2013 and alert-sounding by the BOT, Thailand’s credit growth remains relatively high. “Although y-o-y growth in bank lending has slowed in 2013 due to a high base effect, the expansion in bank credit to the private sector is still outpacing nominal GDP growth,” S&P’s SethChhabria told OBG. Although competition for deposits is placing downward pressure on NIM, margins should be generally supported by strong fee revenue growth. “Although fee revenue growth may slow slightly, we expect it will still outstrip loan growth in coming years,” Nomura’s Moss told OBG.

Although competition for these deposits has placed downward pressure on NIMs, margins should be generally supported by strong fee revenue growth. The key to system stability will be for the authorities to ensure fair competition between commercial lenders and state-owned institutions. Therefore, the challenge for the lenders will be to deepen banking relationships and move a larger share of clients towards investment services.