Bangkok--31 Mar--Fitch Ratings
Link to Fitch Ratings' Report: Thai Banks: Annual Review and Outlook
Fitch Ratings has today said the outlook on Thai banks should remain stable for the next 12 to 18 months. The agency expects economic conditions to remain supportive of banks' overall performance, but main risks include strong credit growth in some large corporate and retail sectors, surging funding costs and potential asset quality pressure due to higher interest rates from rising inflation, and lingering global uncertainties. Nevertheless, the banks' earnings and core capital provide reasonable buffers against economic shocks.
While rising funding costs and competition are likely to pressure Thai banks' net interest margins, Fitch expects healthy loan demand, rising fee income and moderate provisions to support overall profitability. The agency believes the major banks are better positioned than their smaller competitors to manage the impact of rising funding costs, given their larger deposit franchises.
In Fitch's view, the banks' steady earnings help support core capital buffers at acceptable levels for their ratings. The agency also notes that the banks do not rely significantly on hybrid capital securities, as paid-up capital and retained earnings - which have the strongest loss absorption capacity - remain the major components in their capital structure.
The banks' asset quality has shown steady improvement, with declining non-performing loans (NPLs) and increasing reserve coverage. At end-2010, Thai banks' NPL ratio was 4.4% (2009: 5.9%) and reserve coverage was 91% (2009: 76%). Over the longer term, Fitch expects that the enhancement of underwriting standards and active prevention and resolution of impaired loans to further improve asset quality.
Meanwhile, the agency is of view that funding and liquidity risks should remain manageable. While the average loan/deposit ratio of 97% (for the six largest banks which account for about 80% of the banking system's assets) is generally higher than most banks in Asia, funding risk is manageable due to their adequate liquid asset levels and stable retail deposits.
Events which notably raise capital impairment risks, such as sharp rises in NPLs due to weaker-than-expected economic growth and/or overly aggressive growth, could be negative for ratings. The continued improvements in key performance measures, such as higher return on assets and lower NPLs, should generally be positive for Thai banks' credit profiles.
The full report, entitled "Thai Banks: Annual Review and Outlook - Resilient Economy Supports Bank Performance, but Inflation and Global Uncertainties Pose Risks ", is available at www.fitchratings.com or by clicking on the link above.