Bangkok--1 Sep--Fitch Ratings
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Fitch Ratings believes that Thai banks’ exposure to the SME segment is increasingly becoming the main source of downside risk to asset quality, and is likely to contribute to higher NPLs over the next 12-18 months. Nevertheless, larger and more diversified banks should be relatively well-positioned to cope with these risks without significant ratings pressure.
SMEs account for the largest segment of Thai bank loans, at about 39% of total loans as of end-June 2015 (compared with exposure of 30% to large corporates and 31% to consumers). SME loan growth has been strong, particularly during 2011-2013, with average annual growth of about 14%. This was driven by expanded lending to smaller SMEs with relatively weaker credit profiles, due to intensifying competition and the prospect for wider margins. Nevertheless, SME loan growth has slowed markedly to 3.4% in 2014 and 3.7% in 1H15 as the banks have become more cautious in line with the weak economy.
The operating environment still appears unfavourable, with relatively low economic growth, volatile financial markets, and muted business sentiment. Furthermore, high leverage in the economy (with private-sector leverage at 150% of GDP as of end-March 2015) means that debt repayment ability can quickly deteriorate if conditions worsen further.
Asset quality for SMEs has remained mostly intact. There was only a moderate increase in the NPL ratio for SME loans in 1H15 to 3.4% from 3.1% at end-2014, while “special mention” loans (which are delinquencies not yet classified as NPLs) were flat at 2.4%. Fitch believes that asset-quality risks may be masked in the short term by debt restructuring and the authorities’ initiatives to support the SME segment (such as low-interest policy loans and the credit guarantee scheme). However, asset quality could deteriorate more sharply if economic conditions weaken and as supportive measures begin to lapse.
The size and diversity of the segment means that SME clients’ credit profiles vary significantly for each bank and across the sector. Fitch expects larger banks with well-established franchises to be in a better position to compete for stronger and larger SME clients, and would therefore be less exposed to asset-quality risks. These larger banks also tend to have more diversified revenues and loan books, and a stronger loss-absorption capacity in general.
The Thai banking sector as a whole has reasonable buffers, in term of reserves and capitalisation, which should enable it to cope with a normal cyclical economic downturn. The average loan-loss reserve coverage ratio for the sector remained strong at about 136% at end-June 2015, while the average Tier 1 capital ratio was at 14%. In addition, SMEs loans are generally well-collateralised, and some smaller banks also use partial guarantees from the state-owned Thai Credit Guarantee Corporation to mitigate the risks.