Turning point: Increased loan demand driving sector out of credit down cycle

The banking sector experienced mixed results in 2017. Although bank loans and asset quality benefitted from the country’s ongoing economic recovery, with operating profits rising as a result, high provisioning costs and preparations for the new accounting standards that take effect in 2020 saw net profits decline for many larger commercial banks. The sector is resilient, well capitalised and liquid, but non-performing loans (NPLs) remain high, particularly for smaller businesses.

Similarly, consumer debt is also on the rise, with stakeholders reporting that the country’s economic recovery has been limited to larger corporates, as the rate of loan defaults of small and medium-sized enterprises (SMEs) and home buyers has increased. Corporate lending was stagnant as businesses turned to alternative financing channels, while banks’ fee-based income came under pressure after the launch of a new national online payment system.

Despite these challenges, the sector is set for steady growth in 2018. NPLs are expected to have peaked in 2017, and an anticipated surge in public spending on infrastructure will further support economic recovery, loan growth and bank profitability. Although financial technology (fintech) presents new challenges for traditional lenders, the sector is expected to benefit from the wider adoption of fintech tools and platforms, with mobile banking and blockchain technology in particular offering significant growth opportunities (see analysis).

STRUCTURE: As of July 2018 there were 15 domestic commercial banks, four foreign bank subsidiaries, 11 full branch foreign banks, two finance companies and three credit foncier firms operating under the supervision of the central bank, the Bank of Thailand (BOT). Additionally, there were eight government-owned specialised financial institutions (SFIs), including the Bank for Agriculture and Agricultural Cooperatives, the Export-Import Bank of Thailand, the Government Housing Bank, the Government Savings Bank, the Small Industry Credit Guarantee Corporation, the Secondary Mortgage Corporation, the Small and Medium Enterprise Development Bank of Thailand, and the Islamic Bank of Thailand. SFIs play a vital role in the Thai financial system, accounting for 25% of total deposits and 29% of total household debt as of 2016. In 2014 the Ministry of Finance (MoF) announced plans to transfer supervisory and inspection responsibilities for SFIs to the BOT. The BOT’s SFI Supervision and Examination Department has overseen the segment since mid-2016.

The four largest commercial banks are Bangkok Bank, Kasikornbank (KB ank), Siam Commercial Bank (SCB) and Krung Thai Bank (KTB). In December 2017 KB ank was the largest bank in Thailand in terms of market capitalisation with $16.5bn, followed by SCB with $16.1bn, Bangkok Bank with $11.9bn, and KTB with $8.4bn, according to Singapore-based brokerage firm DBS Vickers Securities.

INTERMEDIATION: Financial intermediation has recorded consistent growth in recent years, recovering from a 0.8% contraction in 2008 to grow by 11.2% in 2009, 5.9% in 2010, 6.1% in 2011 and 15.5% in 2012. Though growth has moderated in the following years, intermediation remains robust, with a rise of 12.5% in 2013, 7.5% in 2014, 8.4% in 2015 and 6.5% in 2016, according to the BOT.

The National Economic and Social Development Board (NESDB) reported that financial intermediation increased by 4.6% in the first quarter of 2017 and by 5.1% in the second quarter, supported by household credit growth, including real estate loans and rising household consumption. It then grew by 4.6% in the third quarter of 2017 before moderating to 4.2% in the following quarter, as a result of a slowdown in the commercial banking sector, with the total volume of loans and deposits failing to offset declining net interest incomes at commercial banks. Overall, financial intermediation recorded an increase of 4.6% over the course of 2017.

According to the BOT, bank assets have also risen steadily in recent years, with total assets climbing from BT15.5trn ($448.7bn) in May 2013 to BT16.4trn ($474.7bn) in May 2014, BT17trn ($492.1bn) in May 2015 and BT17.7trn ($512.3bn) in the same month of 2016. In the following 12 months total assets rose further to BT17.9trn ($518.1bn) and to BT18.8trn ($544.2bn) in May 2018. Capital funding also increased, from BT2.4trn ($69.5bn) in May 2017 to BT2.5trn ($72.4bn) the following year, while the loan-to-deposit ratio moderated from 96.14% to 95.96% over the same period.

HEAVY HITTERS: Bangkok Bank is Thailand’s leading corporate lender as of the end of 2017, recording BT3.1trn ($89.7bn) of assets, a BT2trn ($57.9bn) loan portfolio and BT2.3trn ($66.6bn) of deposits. The bank’s total interest income rose from BT102.4bn ($2.96bn) in 2016 to BT105.5bn ($3.05bn), and it was the only one of the big four banks to record net profit growth in 2017, which increased from BT32bn ($926m) in 2016 to BT33bn ($955m).

Bangkok Bank’s large exposure to corporate loans – with large corporates comprising 42% of its loan portfolio and SME loans accounting for 30% – will likely make it one of the biggest beneficiaries of an anticipated investment up cycle in 2018, supported by public infrastructure investment and resurgent private sector investment. An agreement with life insurance company AIA, reached in October 2017, is also expected to boost the bank’s revenues, with bancassurance fees accounting for between 4% and 5% of its income from fees.

Total assets for KB ank rose from BT2.8trn ($81bn) in 2016 to BT2.9trn ($83.9bn) in 2017, while net interest income increased from BT89.7bn ($2.6bn) to BT94.2bn ($2.7bn). Non-interest income declined, however, dropping from BT63.7bn ($1.84bn) to BT62.7bn ($1.81bn) over the same period, as did net profits, which fell from BT40.2bn ($1.2bn) to BT34.3bn ($992.9m). Due to the commercial bank’s marginal bottom-line growth at the end of 2017, significant development over the short term is unlikely, according to DBS Vickers Securities; however, the brokerage firm noted that KB ank maintains a competitive advantage as the leader in digital banking and in the area of non-interest income generation.

Meanwhile, KTB’s total assets rose from BT2.6trn ($75.3bn) in 2016 to BT2.8trn ($81bn) in 2017, and total loans grew from BT1.8trn ($52.1bn) to BT1.9trn ($55bn). Over the same period, deposits increased from BT2trn ($57.9bn) to BT2.1trn ($60.8bn), while non-interest income was up slightly, from BT31.46bn ($910.6m) to BT31.47bn ($910.9m). In contrast, net interest income fell from BT75.5bn ($2.2bn) to BT73.9trn ($2.1bn). Net profits also dropped in 2017 to BT21.3bn ($616.6m) from BT30bn ($868.4m) in 2016. While KTB is a proxy for government investment, given that it is a state-owned bank licensed under the MoF, it is nonetheless expected to be at risk of higher provisioning expenses as it prepares for the implementation of the new International Financial Reporting Standard 9 (IFRS 9).

Rounding out the big four, SCB’s total assets rose from BT2.66trn ($77bn) at end-2016 to reach BT2.73trn ($79bn) one year later, with customer loans, which comprise 75.1% of the bank’s assets, standing at BT2.1trn ($60.8bn). Over the same period, net interest income increased from BT80.2bn ($2.3bn) to BT82.9bn ($2.4bn), while net fee and service income hiked from BT31.7bn ($917.6m) to BT32.1bn ($929.2m). Net profits, however, dropped from BT41.2bn ($1.2bn) to BT37.9bn ($1.1bn). According to DBS Vickers Securities, the bank’s transformation projects and staff cost adjustments drove its cost-to-income ratio higher, while its non-interest income has yet to improve as a result of the broader, unfavourable economic environment.

LOAN GROWTH: Lending experienced marked improvement in 2017, with the BOT reporting that the overall growth rate rose from 2% in 2016 to reach 4.4%. This was supported by an acceleration in SME and automobile lending late in the year, which boosted private sector loan growth from 4.4% in 2016 to 4.7% by the end of 2017.

Corporate lending, which accounted for 67% of total loans, expanded by 3.6% in 2017. This was driven entirely by SME loan growth, with the BOT reporting that large corporate lending was stagnant as firms moved to repay loans via alternative sources, such as equity and debt securities.

Nevertheless, some companies did turn to banks for financial support, namely electronics manufacturers and firms in the energy and transport sectors. As of December 2017 manufacturing accounted for the largest share of corporate lending with 18.2%, followed by commerce (15.2%), financial businesses (9.1%), public utilities (7.6%), services (7%), real estate (5.3%), construction (1.9%) and others (2.7%).