Thailand’s banking sector remained resilient in 2015 despite challenging macroeconomic conditions, including slowing demand in China and high levels of consumer debt. Loan growth continued, despite moderating from the double-digit highs of previous years, and loan capital improved even as the non-performing loan (NPL) ratio rose. Operating profits of banks simultaneously increased, although net profits declined due to increased provisioning.
A host of government stimulus packages, as well as the Bank of Thailand’s (BOT) strategy to maintain an accommodative monetary policy, will help bolster loan growth and contain NPLs in 2016. This should, in turn, keep the sector attractive to outside investors, with new entrants and acquisitions anticipated as ASEAN integration accelerates.
“The banking sector and the greater economy can anticipate a steady recovery in 2016,” Kittiya Todhanakasem, first senior executive vice president of Krung Thai Bank (KTB), told OBG. “The previous two years saw high NPL rates stemming from mortgage housing loans and small SME loans.”
Overview
As of December 2015 there were 19 commercial banks, 12 full branch foreign banks, two finance companies and three credit foncier companies registered in Thailand. The past decade has seen an influx of foreign investment in the sector, and foreign banks accounted for 22.2% of total lending at the end of 2014, compared to 12.5% in 2009. Within the commercial banking sector, corporate loans comprise 68.4% of total lending and consumer loans 31.6%.
Thailand’s portfolio of specialised financial institutions (SFIs) comprises eight state-owned banks which had, until recently, operated under regulations set by the Ministry of Finance (MoF) rather than the BOT. However, in the wake of rising NPL ratios, Cabinet moved in December 2014 to approve new measures giving the BOT regulatory oversight over SFIs. SFIs have played an increasingly prominent role in extending financial service access to the unbanked population, and institutions – including the Government Savings Bank, Government Housing Bank (GHB), Small and Medium-Sized Enterprise (SME) Development Bank, and Bank for Agriculture and Agricultural Cooperatives – are active in extending credit, including microfinance, to specific demographics.
Commercial Banks
The four largest commercial banks of Thailand together hold just under two-thirds of the total industry assets.
The state-owned KTB is Thailand’s largest lender by assets, with BT2.81trn ($84.6bn) of assets at the end of 2015. Launched in 1966 after the merger of the state-owned Kaset and Monton Banks, the bank played an instrumental role in absorbing various failed financial institutions in the wake of the 1997-98 Asian financial crisis. The MoF, through its Financial Institutions Development Fund, owns a 55.07% stake in KTB, which focuses heavily on government business and public sector employees.
Bangkok Bank, which began operations in November 1944 and today has the largest retail customer base in Thailand, as well as regional branches in Malaysia and China, reported BT2.74trn ($82.5bn) in assets in 2015, up 3.4% from 2014.
Siam Commercial Bank (SCB), the market’s third largest with assets of BT2.56trn ($77.1bn) in Q4 2015, was established in 1907 by Royal Charter. Shareholders include the Crown Property Bureau and the MoF, through its Vayupak Mutual Fund, which hold 23.69% and 23.12% stakes, respectively.
KB ank, established in June 1945, held assets of BT2.55trn ($76.8bn) in December 2015, making it the fourth-largest commercial lender by assets.
Growth In 2015
In June 2015 Moody’s Investors Service gave a stable outlook to Thailand’s banking system. The ratings agency wrote that although asset quality is likely to deteriorate, given prevailing macroeconomic conditions and high household debt, lower interest rates, which will help borrowers service their loans, should keep the NPL ratio in check. At the same time, the ratings agency praised Thai banks’ reserve coverage and capitalisation levels, which have provided the sector with large buffers to absorb losses. “The central bank has to some extent anticipated this sharp rise in household debt and is continually involved in fostering financial responsibility,” Lyn Kok, president and CEO of Standard Chartered Bank ( Thailand and Greater Mekong), told OBG. “This includes inculcating adherence to conservative lending practices and maintaining a reasonable household debt-service ratio across the country.”
Although lending slowed again in 2015, years of consecutive growth have kept earnings high, while lower credit costs stemming from the BOT’s ongoing accommodative lending policy, coupled with stable net interest margins (NIM), have further underpinned profitability. In 2015 Thailand’s banking system recorded operating profits of BT370.2bn ($11.1bn), although net profits declined to BT192.3bn ($5.8bn) as a result of the large provisioning expenses required after a major corporate default. Due to this, return on assets declined from 1.3% in 2014 to 1.1% in 2015, while NIM eased from 2.6% in 2014 to 2.5%.
Lending
According to BOT data, a gradual economic recovery and increased funding through capital markets bolstered loan growth to 4.3% in 2015. Although lending growth remains positive, this was a slowdown compared to 11% and 5% growth in 2013 and 2014, respectively, and marked the fourth consecutive year that loan growth fell.
Moderation was driven by slower corporate loan growth, which rose by 3.1% in 2015 compared to 4% in 2014. Large corporate loans were the worst-performing in 2015, rising by 0.1% in 2015, compared to 4.8% in 2014, as a slowdown hit both the commerce and manufacturing segments.
Other major factors affecting large corporate lending, according to the BOT, were banks’ moves to raise funding through capital markets and delay debt repayment, as well as writing off bad loans. SME lending, which has consistently outperformed broader bank lending, rose by 5.6% year-on-year (y-o-y) in 2015, an increase over 2014’s 3.4%.
Consumer Credit
Industry growth over the past decade has been supported by fast-expanding consumer debt, particularly the auto financing and unsecured loans segments. Between 2008 and 2015 nominal household debt more than doubled, reaching approximately 81% of GDP. Consumer lending growth declined marginally in 2015, falling from 7.4% in 2014 to 7.1%, ending the year at BT3.7trn ($111.4bn). The BOT reported that almost all categories of consumer loan growth moderated in the fourth quarter of 2015 except for car loan growth, which rose by 1% from BT860bn ($25.9bn) to BT868bn ($26.1bn) after six consecutive quarters of contraction. In 2015 total outstanding home loans rose by 9.5% from BT1.69trn ($50.9bn) to BT1.85trn ($55.7bn); personal loans rose 5.2% from BT746bn ($22.5bn) to BT785bn ($23.6bn); and credit card lending rose 6.5% from BT199bn ($6bn) to BT212bn (6.4bn).
Liquidity tightened in 2015 and Thailand’s loan-to-deposit ratio simultaneously increased from 95.7% in Q4 2014 to 97% in Q4 2015. Total deposits at commercial banks stood at BT11.2trn ($337.1bn) in December 2015, a 1.46% y-o-y increase, according to KB ank data. The ratio of gross loans to deposits, plus issued debt and borrowing, increased from 88.7% in 2014 to 90.8% in 2015, while banks’ liquid asset to total asset ratio fell from 22.32% in 2014 to 20.1% in 2015.
Debt Trap
Consumer debt is approaching unsustainable levels, with the Financial Times reporting that new car financing and some credit card debt can easily amount to a year’s salary for the average middle-class consumer. This was exacerbated by previous government stimulus programmes, such as an incentive programme for first-time car buyers rolled out in 2011, which resulted in over 100,000 auto loan defaults by September 2013.
For up to 2m low-income Thais the situation is even more of a challenge, as they routinely turn to off-system money lenders if they cannot access legitimate credit. Loan sharks, illegal pawn shops and gold shops are the most common avenues, with off-system interest rates ranging from a low of 3% per month on illegally pawned gold, to as high as 1% or 2% per day for loan shark borrowing – far beyond the 36% annual legal limit for effective interest on nano-loans.
Unsustainable debt levels are a particular challenge for farmers, as Thailand’s major agricultural exports, rice and rubber, have been hit by falling commodities prices in recent years. Thai factory workers – who often owe between six and 12 months of their salaries in formal loans, in addition to one months’ pay in illegitimate debt – have significantly reduced disposable income. Lenders are grappling with what was the highest official deflation of any emerging market in June 2015 (see Economy chapter), making the true cost of borrowing far more expensive over time.
NPL Ratio
Rising NPLs remain a concern, even though Thailand’s economic recovery is ongoing – the National Economic and Social Development Board projected GDP growth between 2.8-3.8% in 2016 from 2.8% in 2015 and 0.9% in 2014. The BOT reported that NPLs reached BT337.5bn ($10.2bn) in 2015, rising by BT60.3bn ($1.8bn) from 2014, with the gross NPL-to-total-loan ratio rising from 2.15% in 2014 to 2.55% in 2015. However, special mention loans – meaning loans overdue by more than one month but less than three – fell by BT22.3bn ($671.2m) to hit BT314.1bn ($9.5bn), bringing the special mention loan ratio down from 2.61% in 2014 to 2.38%.
Government Stimulus
The public and private sector are now moving to address NPLs and support lending growth after a challenging 2015. The government expects a number of stimulus packages will bolster lending in key segments and has launched programmes targeting SMEs, micro-lending programmes – such as the Thailand Village and Urban Revolving Fund (see analysis) – and also a new home-buying stimulus programme.
In October 2015 the MoF announced it had approved a property stimulus package, which includes cuts to housing transfer and mortgage fees for properties priced below BT3m ($90,300), as well as tax deductions for home buyers. Interest rates are set at 3.5% for the first three years, 4.75% the year after and adjusted annually based on monthly recurring revenue rates plus 0.5% afterwards. First-time buyers are now eligible to deduct 20% of their new home’s value from their annual personal income tax for five years, provided it is purchased by the end of 2016 and costs less than BT3m ($90,300). The state-owned GHB was also allocated BT10bn ($301m) to provide low-income earners with home loans, while housing transfer and mortgage fees have both been cut significantly to 0.01%, from 2% and 1%, respectively. Pikul Srimahunt, head of mortgage and small enterprise products at SCB, told local media that commercial banks’ home loan portfolios could rise by as much as 10% in 2016 as a result of the programme.
Accommodative Policy
The BOT is also aiming to support both lending growth and debt servicing by maintaining an accommodative monetary policy. In February 2016 the BOT’s Monetary Policy Committee voted unanimously to hold the interest rate at 1.5% for a sixth straight meeting, after unexpectedly cutting it twice in March and April 2015.
In addition to bolstering lending growth, a sustained accommodative lending policy should also help heavily-leveraged consumers service their debts more easily. Rates are not expected to rise in 2016, and in February, the BOT governor Veerathai Santiprabhob told Bloomberg that the bank is ready to act in the event of external shocks, including a sustained decline in oil prices and a further slowdown in China. Veerathai said that “even though we say that for now we see limited need for further easing of monetary policy, it doesn’t mean we shut the door for the possibility for easing in monetary policy if the environment doesn’t turn out as we expected”.
Private Sector Protection
The private sector, meanwhile, has begun to offer more accommodative grace periods for SME borrowers, while four new nano-lenders entered the market in 2015 to expand credit access and reduce reliance on off-the-books lending (See analyses). Private banks have also been leading the charge in development and adoption of new digital banking platforms to reduce operating costs and improve access to a wider spectrum of financial products (see analysis). Moody’s reports that Thai banks have also provisioned heavily in recent years, after the BOT encouraged them to build counter-cyclical buffers, which have kept the average ratio of reserves to problem loans for rated banks at comfortable levels since 2012.
At the end of 2015 total capitalisation stood at a robust BT2.23trn ($67.1bn) as a result of appropriation of retained earnings, capital increase and issuance of financial instruments, such as Tier-2 capital. The capital adequacy ratio, which includes Tier-2 capital, stood at 17.4%, while the Tier-1 ratio was 14.5%, well above the Basel III requirements of 10.5% and 6%, respectively. Banks continued to accumulate loan loss provisions in 2015, with total provision rising by 11.7% in 2015 to reach BT444.5bn ($13.4bn), ending the year with a regulatory loan loss provision of 156.3%.
Lending Forecast
Forecasts for lending growth in 2016 remain positive. In its lending outlook for the first quarter of 2016, KB ank reported that loans at commercial banks are expected to rise between 4% and 4.2% y-o-y as a result of the ongoing government stimulus in the property sector, and soft loan draw-down by SMEs. Commercial banks are simultaneously expected to keep interest costs low – in order to maintain profitability – and launch special holiday deposit campaigns timed for Chinese New Year and Valentine’s Day, keeping liquidity on par with Q4 2015.
Credit card and personal lending are expected to further decelerate in 2016, with KB ank reporting that concerns over the cost of living and modest household earnings will keep credit card spenders vigilant in 2016, particularly as many of these consumers are burdened with more than one loan.
As such, credit card spending growth is expected to fluctuate 4-6% this year, amounting to between BT1.31trn ($39.4bn) and BT1.33bn ($40bn) in total spending. Credit card lending is forecast to rise by 7-9%, which is significantly lower than the average growth rate of 12.8% that was recorded between 2010 and 2014, but keeping the consumer segment at the forefront of lending growth.
Foreign Investment
Although sector growth will be slower in 2016 compared to the expansionary period of 2008 to 2014, the sector remains attractive to foreign investment. This is particularly true as ASEAN integration and regional competition ramps up and members prepare for the 2020 enactment of a banking integration agreement, allowing greater cross-border access for qualified banks.
Foreign branches in the country have been allowed to open a second branch since March 2010, and in 2014 the BOT unveiled the four-year second phase of its Financial Services Master Plan (FSMP2), which allowed foreign banks with branches in Thailand to apply for a subsidiary licence.
More recently, the Ministry of Commerce announced in February 2016 that it had struck commercial banking, representative offices of foreign banks, and life- and non-life insurance operations from the list of activities restricted under the Foreign Business Act. This means they no longer require a foreign business license to operate, although they will still be subject to licensing requirements and foreign shareholding limits – which were set at 49% through the 2007 Financial Institutions Act – unless granted special permission by the MoF.
New Licences
Under the subsidiary license system, foreign banks can open up to 20 branches and 20 off-site ATMs, although they must meet more stringent capital requirements than local banks. Banks are eligible if they come from countries having “significant business relations with Thailand” or those who have signed free trade agreements with Thailand. Countries offering reciprocal access to their home markets for Thai banks are also eligible.
Foreign banks in Thailand have grown their market position sharply in recent years, with notable deals including the acquisition of Thailand’s fifth-largest commercial lender, Bank of Ayudhya, by the Mitsubishi UFJ Financial Group, which paid $5.31bn for a 72% share in 2013. Under the new licensing system implemented by the FSMP2, Australia’s ANZ Bank and Sumitomo Mitsubishi Trust Bank both obtained subsidiary licenses, in July 2014 and June 2015, respectively.
In April 2015, Fitch Ratings announced it expects foreign banks to continue expanding their presence in Thailand’s commercial banking sector, the majority of which will be banks based in the Asia-Pacific region.
Regional Expansion
An anticipated increase in cross-border transactions has also raised the potential for regional expansion of domestic banks, and indeed, a number of Thai financial institutions have announced plans to expand operations. In January 2016, for example, KTB officials told Bloomberg that the bank was in the midst of improving its balance sheet and boosting profitability by expanding into high-yielding SME and retail lending, as well as advisory services bolstering fee-based income, as it prepares to make unspecified acquisitions in a bid to become a major regional player.
In February 2016 KB ank announced it will open its first branch in the Cambodian capital Phnom Penh before August 2016, and a second branch in the Laotian capital Vientiane before September. The bank, which already has a representative office in Cambodia, has been operating on a local bank license in Laos since 2014, the first foreign bank to do so. KB ank also hopes to expand to Vietnam, Myanmar and Indonesia in the coming years after obtaining the relevant licenses. The bank is also focusing on China as a potential new market, with three branches already operating on the mainland, and plans to upgrade itself to a local bank, as Bangkok Bank has done.
Outlook
Although Thailand’s banking sector is unlikely to witness a return to the double-digit growth of 2011 and 2012, the sector remains stable and growth forecasts steady, despite challenging macroeconomic conditions. Although NPLs will likely rise, particularly among consumer and large corporate borrowers, in 2016 lending and spending growth should stay steady as the economy stabilises, underpinned by government stimulus packages and accommodative central bank policies.
In the longer-term, an anticipated spate of new infrastructure projects could give corporate lending a much-needed shot in the arm, in addition to providing the economic growth needed to restore consumer purchasing power. Furthermore, an intensifying focus on SME and micro-lending should address the challenges facing many Thai citizens in accessing credit, keeping the sector on a steady upwards trajectory.
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