Bangkok--31 Oct--Moody
The past week saw a marked escalation in Thailand’s floods. Last Tuesday, floodwaters reached Don Muang Airport, one of Bangkok’s two airports, shutting down commercial flights there. The floods, which started in the northern provinces in July, now threaten to inundate the city center. We expect continuing flood problems to be credit negative for Thai banks as the emerging damages and disruptions are poised to adversely affect asset quality and profitability for at least six months. While no government data has been published, initial estimates from major Thai commercial banks suggest that up to 1% of their outstanding loans would be directly affected, and another 5%-8% indirectly affected.
Estimated economic costs are substantial and rising. Our sovereign team estimates the disaster’s economic costs already exceed THB200 billion (2% of GDP), and if the floodwaters spread to downtown Bangkok, the estimate may increase. As the flood spreads, it is also claiming industrial casualties in agriculture, manufacturing, logistics, services and tourism. The Don Muang Airport shutdown also suggests that the flood has disrupted a substantial portion of the country’s distribution network, which would hurt economic activities even in areas not directly threatened by the inundation.
We expect this disruption to add to recent deterioration in the external demand outlook and pose a significant drag on GDP growth in second-half 2011. Our sovereign team expects real fourth-quarter GDP to contract in annual and quarterly terms, and forecasts full-year GDP growth at 2.8%, down from the pre-floods estimate of 4.0%, and from the 7.8% actual GDP growth in 2010.
Banks are especially vulnerable to the small and midsize enterprise segment as the reported closure of a number of large industrial ventures (more than 400 Japanese auto manufacturers and electronics firms in six industrial parks north of Bangkok have been affected) could directly jeopardize many of their suppliers. We also expect bank profits to be affected by higher provisioning as well as repair costs to ATMs and other premises.
To contain the effect on the banking sector, the government has approved several emergency assistance measures, such as a THB325 billion flood rehabilitation package announced last Tuesday that comprises mostly soft loans (loans provided by the government and government-related entities that have low and below market interest rates, longer repayment periods, and interest holidays). We believe this will mitigate pressures on asset quality.
In addition, the Bank of Thailand (BoT), the country’s central bank, has requested that banks assist affected customers through measures such as principal and interest grace and tenor extension, lower installments, reconstruction financing, and waiving selected fees and charges. The BoT also indicated that it will not classify flood-hit accounts as impaired for one year. We believe, on balance, asset quality will deteriorate in the next six months and that, as a result of policymakers’ signaled forbearance, economic non-performing loans (NPLs) will be higher than reported NPLs.
Despite these credit negative developments, we expect the floods will not materially undermine banks’ creditworthiness because the effects will be short lived and banks’ asset quality was improving in the run-up to the disaster. Credit growth (the denominator effect) and recoveries on problem loans that have exceeded allocated provisions have driven improvements. Central bank data up to the end of June indicates that asset quality has improved across the commercial banking industry. NPL ratios steadily fell to 3.3% at the end of June from 5.3% at the end of 2009. Separately, the BoT estimated that Thai banks owned roughly half of the affected industries’ debt, and that foreign financial institutions owned the remainder. As a result, there will be some degree of burden sharing from external creditors that will mitigate the effect on the domestic banking sector.
In addition, the sector’s good capitalization buffers support the banks’ resilience in this crisis. With an average Tier 1 ratio of 11.3% at the end of June 2011, we expect most banks to have sufficient capital to absorb losses from the current disaster, and to support a potential reconstruction-driven rebound in economic growth in 2012.
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