Bangkok--7 May--Fitch Ratings
Fitch Ratings has changed its outlook on the operating environment rating factor to negative for Thai non-bank financial institutions (NBFIs), due to the economic and business disruptions caused by the coronavirus pandemic.
Fitch forecasts Thai GDP to contract by 5.1% in 2020, which would be the weakest level since the 1997 Asian financial crisis. The severity of the economic shock will lead to a materially weaker trajectory for the performance of Thai NBFIs over the credit cycle, compared with our previous expectations and despite our forecasts of a moderate economic recovery in 2021.
Thai securities companies face considerable downside risks from expected weakness in local capital markets and investor sentiment, which will reduce revenue from investment banking and wealth management. Brokerage commissions have risen so far in 2020 due to an increase in trading activities, but this may not be sustainable if economic conditions remain poor. Furthermore, extremely high levels of volatility could increase the possibility of large, unexpected investment losses that will affect the issuers' balance sheets.
Thai consumer finance and leasing companies also face significant challenges, particularly to asset quality, from the sharply weakening operating environment. Regulatory relief measures on loan classifications and debt moratoriums will delay realisation of credit losses. However, the companies could experience increased non-performing loans and higher credit costs once these measures expire. Thailand's high household debt level (80% of GDP at end-2019) means that asset-quality risks are likely to crystallise, if there were to be a prolonged negative impact on consumers. Meanwhile, bond market disruption has heightened funding risk, which leaves smaller and weaker finance companies exposed to greater liquidity risks due to their lack of stable funding sources and maturity mismatches.
Stronger NBFIs, with well-established franchises, strong capital levels, and sound liquidity profiles, would be better positioned to cope with the more-challenging operating environment. These are mostly subsidiaries of stronger local banks or foreign institutions. The ratings on most independent NBFIs in Fitch's portfolio have been placed on Negative Outlook, reflecting pressure across the various sectors.
For securities companies, a severe deterioration in earnings-generating capacity, with no prospects of recovery over the next one to two years, combined with reduced buffers, would lead to rating downside. For consumer finance and leasing companies without strong institutional support, severe asset-quality weaknesses and an expected failure to return to pre-crisis financial benchmarks, or inability to access funding, could trigger a downgrade.