A gradual increase in economic activity and demand for credit should support both loans and earnings in the Thai banking sector, although a shift away from consumer lending is likely to continue and low interest rates may prompt banks to tap into other revenue streams.
Bank lending is expected to increase by 7-8% this year, according to a report issued by TMB Analytics in April, outperforming the 5% growth recorded in 2014, though still slower than in each of the four previous years. While lending is set to increase, TMB said this would not be the main growth driver for the sector, as recent rates cuts meant the industry was operating in a low-interest-rate environment. Momentum for earnings is likely to come from fee-based activity, which accounts for 17% of revenues.
The focus of lending is also predicted to shift this year, with more credit expected to be extended to those in higher income brackets, the business sector, or to help refinance personal loans or mortgages. A number of analysts predict bank earnings and lending will rise as more credit goes to small and medium-sized enterprises, which offer higher returns than personal loans. With banks also looking to reduce costs, profit margins could widen this year, despite lower than anticipated growth in the economy.
There are also expectations that the Bank of Thailand (BoT) will make further rate cuts in 2015, after trimming its key borrowing benchmark from 2% to 1.75% in March, and again to 1.5% in April. This could feed into downside concerns over the economy, despite stimulating growth and facilitating bank lending.
According to Frank Krings, the chief country officer for Deutsche Bank in Thailand, both local and foreign lenders are taking a somewhat cautious attitude. “This year both Thai and foreign lenders are cautious in their loan outlook, continuing to focus on credit quality over yield, as certain sectors and regions have been harder hit by economic conditions,” Krings told OBG.
Although there may be increased demand for lending to the business sector and potentially the state, private credit growth could be slower.
Bank earnings will also be impacted by weak domestic demand. Consumer confidence remains sluggish, with sentiment falling for the fourth month in a row in April, according to the University of the Thai Chamber of Commerce survey released in May. The university survey showed that the confidence index hit 76.6 in April, the lowest since June 2014, just after the military intervention.
While demand is likely to be sluggish, earlier borrowing has seen debt levels rise sharply in recent years. As of the end of 2014 household debt had reached BT10.4trn ($320bn), representing 85.9% of GDP, according to the BoT, with some forecasts projecting this will increase to 90% by the end of this year.
Concerns over personal debt levels will weigh on the reserve bank when it mulls further rates cuts in the coming months, with the BoT likely to be wary of encouraging higher household indebtedness while trying to prime the economic pump. “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.”
On April 10, the IMF upgraded its growth forecasts for the Thai economy, saying it expected GDP to expand by 3.7%, up from its February estimate of 3.5%. The IMF prediction is close to that from the BoT, which in mid-March said the economy would grow by 3.8%, somewhat lower than its earlier projection of 4%. Other analysts are less optimistic, with the Kasikorn Research Centre recently cutting its growth forecast from 4% to 2.8% on the back of slowing export earnings.
However, even the lower end of the range of forecasts will depend on the state following through with infrastructure and other investment projects, the BoT said in a statement issued on April 9. If it does not, the economy is projected to expand by a more modest 2.5% this year.
If the government is to push ahead with some of the large-scale developments it has in the planning pipeline, it may need to tap local banks for funds, either through direct borrowing, bonds or Treasury notes. This could spur loan and earnings growth for Thai banks and feed into the domestic economy, further supporting expansion.
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