Bangkok--30 Jul--Fitch Ratings
Fitch Ratings-Bangkok-30 July 2019: The 1H19 financial results for Thailand's listed banks were stable, with trends in asset quality and profitability broadly supportive of credit, Fitch Ratings says. Loan growth fell short of estimates, reflecting continued subdued business sentiment and consumer confidence. However, we would expect profitability and stability of returns for the remainder of 2019, with a continued gradual buildup of capital to guard against downside risks as well as upcoming regulatory measures such as IFRS9 implementation in 2020.
Credit growth for Thai banks was much lower than expected at 1% for 1H19, reflecting lack of demand and conservative underwriting. While expected to improve, it will likely trail Fitch's full-year forecast of 7% given current trends, with increased preservation of capital as a result. Anemic retail lending growth fell to 3.1% for 1H19, down from the 7.8% growth of 2018 due to slowing auto sales and the Bank of Thailand's (BOT) tightening of loan-to-value measures on mortgages that became effective in April 2019. Corporate lending also encountered pressure, with mounting approval delays of new infrastructure projects.
Thailand's GDP was 4.1% in 2018 and is expected to fall to 3.3% this year before moderating to 3.5% in 2020. Continued infrastructure project delays and lower investment by export-oriented firms remain downside risks, as does further escalation of the trade war.
Listed Thai bank asset quality has been stable with an impaired loan ratio of 3.7% as of June 30, 2019. We expect more of the same for the rest of the year. Downside risks could come from small to medium enterprise (SME), residential mortgage and auto loans segments, which have relatively high debt levels and a reduced capacity to withstand shocks. However, we do not expect a substantial increase in asset quality risk under current economic conditions, aided by the BOT's recent macro-prudential regulations and the banks' high loan loss reserves, with allowances at 152% of impaired loans.
Core net interest margins are expected to be stable in the near term. Market expectations are for interest rates to be little changed, and the low levels of credit growth should not pressure bank liquidity, as the system's liquidity coverage ratio was 173% as of May 2019. We expect earnings trends going forward to be driven by fee income and credit costs.
Return on assets for listed banks was 1.3% at June 31, down just 2 bps YOY but aided by a substantial decline in provisioning expense amid solid capital buffers and the expectation for credit improvement. Lower credit provisions helped offset higher employment costs, investment in operations and IT and the significant reduction in non-interest income, pressured by lower insurance premiums due to regulatory changes. Hence, expenses as a percentage of income rose to 46.2% versus 44.3% YOY and are expected to remain elevated in the near term.