Bangkok--21 Oct--Fitch Ratings
Fitch Ratings-Bangkok/Singapore-20 October 2011: Fitch Ratings (Thailand) expects Thai financial institutions to be impacted by the country’s worst flood in 50 years, although no immediate negative rating action is expected given exposure to losses is currently deemed by the agency to be generally moderate.
Based on the Bank of Thailand’s (BOT) data, credit exposure of commercial banks to the 10 most affected provinces in central Thailand is THB297bn, or about 3.7% of system loans as of end-August 2011. Including other 20 surrounding less-affected provinces, credit exposure could rise up to THB1trn, or 13.4% of system loans. While current exposure is manageable, it could rise as the floods continue to spread into outer Bangkok and key industrial estates. SME borrowers could be heavily hit, given the concentration of factories in the affected areas.
Fitch expects non-performing loans (NPLs) to increase, although this may not be fully reflected in actual indicators in the short-term because of BOT’s proposal to temporarily relax NPL classification in light of the financial assistance banks are providing to borrowers affected by the floods. Further, prolonged flooding and a slow recovery and reconstruction could lead to higher impaired loans for banks in 2012. Overall, provisioning risk is expected to increase, particularly for those with lower reserve coverage, such as Krung Thai Bank Public Company Limited (rated ‘BBB’/Stable). And for 2012 the provisioning impact is likely to be even greater. Nevertheless, capital buffer remains strong with an average Tier 1 ratio of about 11% for the seven largest Thai commercial banks.
Consumer loans, particularly auto hire purchase loans as well as unsecured personal loans, are also vulnerable. As of now, preliminary assessment provided by major auto lenders shows exposure to the affected provinces to be between 3%-10% of total portfolios, although this could rise if floods continue to spread to metropolitan Bangkok. Among major auto lenders, Thanachart Bank Public Company Limited (‘A+(tha)’/Stable) has higher provisioning risk given its lower reserve coverage. Bank of Ayudhya (‘BBB’/Stable), which has substantial exposure to both used and new car loans and personal finance, could also be susceptible to increased provisioning risk. However, both banks have capital buffer strong enough to absorb the impact.
Among non-bank consumer finance lenders, Fitch expects AEON Thana Sinsap Company Limited (AEONTS; ‘BBB+(tha)’) to see greater impact as the majority of its loans are unsecured, and its target borrowers are mainly in the low- to middle-income group, particularly factory workers who have been among the most affected as a result of the floods. Fitch believes there is a risk of a significant rise in delinquencies in the next three to six months, which could substantially impact profitability. AEONTS’s strong capital and liquidity position, currently with an equity to asset ratio of 14% and a liquid asset ratio of 20% as of end-June 2011, should help weather the impact.