Bangkok--Apr 7--Fitch Ratings
Thai banks' audited 2004 results showed continuing improvement from 2003. The results indicate that the banking sector recovery is on track, with asset quality problems becoming less of an issue and underlying earnings showing stronger signs of recovery. While Thailand's economic growth rate is slowing due to high oil prices, rising interest rates and falling consumer confidence, economic fundamentals remain relatively solid. Private investment should accelerate over the next two to three years, supporting a continued recovery in bank earnings and profitability. The major banks were upgraded in February 2005 on the back of these positive trends.
While Thai banks' gross spreads have been abnormally high and may weaken as liquidity starts to tighten, the negative impact of higher funding costs on profitability should be mitigated by lower impaired loans and stronger loan growth. Hence, net interest margins and profitability should generally continue to strengthen in 2005. Fitch Ratings notes that while Thai banks' reserve and capital levels have improved, stronger asset growth over the next two to three years may see some banks raise additional capital or seek capital relief via securitisation.
Institutional reforms remain somewhat mixed. The Financial Sector Master Plan will likely result in a significant increase in the number of smaller banks, although their longer-term viability will be challenging. The implementation of the Financial Institutions Law appears to have stalled, although the deposit insurance corporation is scheduled to be set-up in late 2005 which should help improve market discipline. The planned merger of the country's two credit bureaus will also help strengthen the institutional framework for banking in Thailand.
Concerns about Thai banks' asset quality were rekindled in 2004 following the Bank of Thailand ("BOT")'s direction to state-owned Krung Thai Bank ("KTB") to reclassify THB45 billion (or USD1.1bn) of loans as impaired in July 2004. This confirmed the agency's concerns specifically on KTB's aggressive lending policies and the potential downside risks on restructured loans for the Thai bank sector generally. The financial impact on KTB so far appears to be moderate, with additional provisioning of THB4.5bn taken through the income statement and a further THB10bn transferred from general to specific reserve. To date, there has been no such large reclassification by the private banks, although restructured loans remain high and vulnerable in a rising interest rate environment.
The significant improvement in profitability for the bank sector in 2004 was mainly the result of lower funding and provisioning costs as well as a pick up in loan growth. Earnings and profitability in 2005 should recover more strongly on the back of higher loan growth. Prospects for the sector remain positive given Thailand's strong domestic economy, improving property market and asset prices, and a pick-up in corporate and consumer financing activity, which should help more fully restore Thai banks' financial strength over the next two to three years.
Thai Banks' Profitability
Net Profit Pre-Provision Profit
2004 2003 % Change 2004 2003 % Change
BBL 17,620 11,355 55.2 21,935 16,229 35.2
KTB 11,094 8,705 27.4 19,470 12,327 57.9
KBANK 15,340 14,756 4.0 18,217 16,284 11.9
SCB 18,489 12,460 48.4 23,920 15,045 59.0
BAY 4,673 3,053 53.1 8,281 6,484 27.7
TMB 948 -14,054 n.a. 6,422 76 8,350.0
BOA 761 1,818 -58.2 1,980 1,783 11.0
Big 7 68,925 38,092 80.9 100,225 68,228 46.9
Source: Thailand's seven largest banks and Fitch
Siam Commercial Bank ("SCB") and Kasikornbank ("KBANK") continue to report the most solid financial performance in terms of earnings, profitability and asset quality. SCB, the largest private mortgage lender in Thailand, reported a net profit of THB18.5bn in 2004, driven by a further fall in funding costs, improved fee and service income and higher one-off gains from investments.
Meanwhile, KBANK, Thailand's third-largest bank, reported an improved net profitf THB15.3bn at end-2004, on the back of a big fall in funding costs, mainly due to the redemption of its hybrid securities.
The bank's net interest margin and underlying profitability are the highest among the Thai banks. KBANK would have seen its net profit improving more significantly if its results were not impacted by lower gains on investment, mainly due to the prior period's one-off gain on its re-classification of investments in its bad loan vehicle, Ploy AMC.
BBL, Thailand's largest bank, also showed improved financial performance with net profits rising to THB17.6bn in 2004 mainly due to higher loan growth and lower funding costs. Its asset quality is expected to improve significantly on the back of declassification of the bank's exposure to the Thai Petrochemical Industry ("TPI") following the expected finalisation of TPI's rehabilitation in 2005.
BAY and TMB also showed improved financial results with net profits increasing to THB4.7bn and THB948m respectively. Earnings growth, improving
asset quality and warrant conversion should enable BAY to strengthen its reserve coverage. The completion of Industrial Finance Corporation of Thailand ("IFCT")'s integration with TMB and the operational support of Singapore's DBS Bank ("DBS") should see TMB's profitability strengthen further over the medium-term.
KTB, the largest state-owned bank, also reported improved financial performance in 2004 with improved net interest margins and net profits rising to THB11.1bn, although the bank's asset quality and reserve coverage deteriorated following the large impaired loan reclassification in 2004. BOA, which was acquired by Singapore's United Overseas Bank ("UOB") last year, also made additional provisioning due to re-evaluation of impaired loans, which impacted profitability in 2004, although the financial and operational support of UOB should bolster its financial position in the medium-term.
The average net interest margins of the country's big seven banks continued to improve. Falling interest rates reduced interest expenses much more sharply than interest income, as the banks' deposit base is larger than their loan base. The redemption of expensive hybrid capital also helped reduce funding costs. Margins were also aided by a slight improvement in asset quality, arising from Thai banks' continued debt restructuring efforts, as well as stronger loan growth.
KBANK recorded the highest net interest margin in 2004, benefiting from quality and lower funding costs, especially after it redeemed its hybrid capital in January 2004. TMB had the weakest net interest margin in 2004, due to the impact of higher impaired loans and funding costs associated with IFCT, which merged with the bank in Q304. Nonetheless, TMB's net interest margin is likely to improve in 2005 as the bank refinances higher-cost wholesale funding from IFCT.
The big seven banks' non-interest income rose by 9% in 2004, boosted by gains on investments, which grew by 22%, and fee income, which grew by 11%. Fee income was primarily driven by loan growth, development in the credit card business, as well as treasury and capital market activities.
With regard to non-interest expenses, most banks managed to contain these relative to their income as the benefits of their re-engineering programmes and the rationalisation of their organisations in previous years started to kick in. Although the non-interest expenses of the big seven banks increased by 9.1% in 2004, their average cost to income ratio fell from 61% to 53.7%. Among the seven largest banks, SCB has the lowest cost to income ratio of 44.2%, followed by KBANK's 52%.
Sector loan growth has gained momentum over the past year, helped by a sustained period of solid economic growth. Excluding the effect of the merger
at TMB, sectoral loan growth was in the order of 8%, a significant pick-up from 4% in 2003. Among the big private banks, BBL, SCB and KBANK recorded the highest loan growth of 9.7%, 9.3% and 8.2% respectively in 2004. State-owned KTB still reported the highest growth at 15%. Lending to small- to medium-sized enterprises ("SMEs") in the commercial and industrial sectors accounted for about half of most big private banks' loan books and will probably remain the backbone of their franchises, although many are expected to shift towards a significantly larger proportion of retail loans over the medium- to long-term. Private banks' consumer loans (mainly owner-occupied housing loans, credit cards and personal loans) currently account for about 15% of the lending portfolio, although SCB has a stronger consumer mortgage portfolio with about 30%. Corporate lending should
start to pick up as ongoing restructuring efforts and new capital expenditure require increased financing.
The asset quality of most Thai banks continued to improve: the average impaired loans of the largest seven banks fell to 14.6% of total loans at end-2004, down from 17.5% at end-2003, thanks to the banks' continued debt restructuring efforts and bad debt write-offs. Among the banks, KBANK appears to
now have the lowest impaired loan ratio at 12.5% of total loans, due largely to substantial write-offs of THB16.3bn of unrecoverable bad loans in 2004.
Among the big seven, KTB and TMB were the only two banks to see their impaired loans increase in 2004. KTB's impaired loans increased significantly to THB123.3bn or 14.5% of total loans at end-2004, up from THB83.9bn or 11.3% of total loans at end 2003. The sharp increase in KTB's impaired loans in 2004 was the result of a more stringent enforcement of loan classification rules by the BOT. While the large reclassification highlights Fitch's concerns about disclosure and asset quality weakness at KTB, the impact on profitability and capital was not
Fitch views the increased regulatory pressure on KTB to improve its loan classification criteria as a positive development for the sector, particularly
given the systemic risks of state-owned banks' aggressive policy lending over the past three years.
TMB reported impaired loans of THB66.4bn, or about 12.9% of total loans, up from THB35bn or 11.7% at end-2003, due mainly to the consolidation of impaired loans from IFCT. BBL's debt restructuring efforts led to impaired loans falling to
THB159.1bn or 17% of total loans at end-2004, down from THB211.5bn or 24.8% at end-2003. The expected approval of TPI's new rehabilitation plan could result in a significant improvement in BBL's asset quality in 2005. Many of the Thai banks' bad loans are going through a liquidation process, so it may be a few years before they are removed from the books, unless they are sold to a third party.
Despite lower impaired loans, the average loan loss coverage ratio of the big seven banks fell slightly to 62% at end-2004 (down from 66.4% at end-2003), with loan loss reserves at most banks falling as a result of bad loan write-offs. SCB has the highest coverage ratio while BBL, KBANK, TMB and BOA
all have coverage of more than 60%. While this should be sufficient, downside risks remain,particularly given the high level of restructured loans, should interest rates rise significantly or economic growth falter. BAY's loan loss coverage remained weak at 31.8%. The bank attributes this to its higher collateral coverage against impaired loans - the result of its focus on lending to SMEs - as well as its lower level of exposure to unsecured syndicated loans,
which are difficult to restructure. Despite these differences between its loan portfolio and those of its peers, Fitch still questions whether BAY, alone among the Thai banks, has been able to avoid asset quality problems to the extent implied by its low provisioning levels.
The average net impaired loans to equity ratios of the big seven banks improved to 51.1% at end-2004 (from 54.2% at end-2003) due in part to further raising of capital at some of the banks and strengthening earnings at a majority of them. Among the big seven banks, KTB and TMB were the only two which had an increased net impaired loans to equity ratio in 2004. The loan reclassification at KTB and the consolidation of DTDB and IFCT at TMB saw both banks' impaired loans increase and their reserve coverage fall in 2004. The ratio for a strong bank should typically be less than 20%. SCB appears the strongest, while BAY looks significantly weaker than its peers.
All Thai banks that had earlier issued hybrid capital/debt securities have redeemed such securities over the past year. While most banks redeemed all of
their hybrid securities, BBL redeemed only part of its hybrid securities by offering its hybrid securities holders the option to continue holding these securities at a lower return (i.e. three-month fixed deposit rate + 1.75%) or have them redeemed.
Approximately 60% of BBL's hybrid securities holders (accounting for THB17.6bn) decided to roll them over, while the remaining 40% (THB28.4bn) redeemed them. With additional capital raised in 2003 and some hybrid capital remaining on the book, BBL's Tier 1 capital appears relatively strong, at 10.2%, when compared with most other big banks.
TMB was the first to redeem its hybrid securities after it successfully raised THB22.4bn of new capital in September 2003. KBANK also redeemed its hybrid securities in January 2004 by using internally generated profit.
BAY redeemed its hybrids in March 2004 after it successfully raised THB10bn in common equity via a private placement in August 2003. Another THB15bn of capital is expected to be accumulated over the next five years, subject to the exercise of warrants given to existing and new shareholders of the bank under its recapitalisation plan. While the redemption of hybrid capital was considered a positive step for BAY while it reduced funding costs, it also reduced the bank's Tier 1 ratio to about 6%, which appears weak particularly given its low reserve coverage.
Among the big seven banks, only TMB and BOA still had negative retained earnings at end-2004. Of the remaining five banks, which all had positive
retained earnings at end-2004, BBL, KBANK, SCB and KTB have already announced a resumption of dividend payments, since the 1997 crisis.
Fitch believes the new Financial Sector Master Plan, which was approved by the Thai cabinet at the beginning of 2004, is likely to have only a moderate impact on the country's banking landscape over the medium-term. The plan aims to broaden general access to financial services and encourage banks and finance companies to consolidate and streamline other banking operations.
Under the Financial Sector Master Plan, only one deposit-taking entity is permitted in a financial group. This policy mainly affects foreign banks with a majority shareholding in hybrid banks and a foreign branch licence. As a result of the new policy, ABN AMRO sold its 81% stake in BOA to Singapore's UOB. UOB Radhanasin ("UOBR"), which is 79% owned by UOB, will merge with BOA in Q305.
BOA will then have THB227bn in assets and a c.4% share of the Thai banking sector.
Standard Chartered ("SC") expects to merge its Bangkok branch operation with Standard Chartered Nakornthon Bank ("SCNB") in 2005, pending BOTapproval. SCNB's asset size is expected to increase to about THB134bn following the merger, with its market share growing to about 1.7%.
The consolidation of DBS Thai Danu Bank ("DTDB") and IFCT into TMB was completed in September 2004. The merger resulted in the creation of Thailand's fifth-largest bank with total assets of about THB670bn. The merger should produce cost and business synergies in the medium-term, particularly with the support of a strong strategic partner in DBS.
The full guarantee by the Financial Institutions Development Fund (FIDF) for depositors is expected to be replaced by a deposit insurance scheme in late
2005. The scheme will be implemented progressively over four years, with coverage of up to THB50m in the first year declining to THB1m by the fourth year. The deposit insurance scheme is expected to strengthen and minimise instability in the financial system that may arise when there is a run on deposits at a bank. Premiums of up to 1% of deposits per year will be levied on member financial institutions with the rate varying, depending on the bank's financial strength. Given liquidity is expected to tighten, the limited insurance scheme is likely see
funding costs and insurance premiums rise for the weaker banks, while the stronger banks should benefit. Fitch views the scheme as positive to the Thai banking sector in the long-term as it will likely add pressure on Thai banks to improve their financial strength.
National Ratings
Long-Term Short-Term Outlook
Krung Thai Bank AA(tha) F1+(tha) Stable
Kasikornbank AA(tha) F1+(tha) Stable
Bank of Ayudhya A-(tha) F1(tha) Positive
Thai Military Bank A(tha) F1(tha) Positive
Bank of Asia AA+(tha) F1+(tha) Stable
Source: Fitch
In February 2005, Fitch upgraded the ratings of BBL, KBANK, SCB, BAY, TMB and BOA. The upgrade followed the release of Thai banks' preliminary 2004
financial results, which showed continued improvement in profitability. The prospects for the sector remain positive given Thailand's strong domestic economy, improving property and asset prices and a pick-up in corporate and consumer financing activity, which should help Thai banks more fully restore their financial strength over the next two to three years. The main risks to the sector's improving performance are a significant rise in interest rates or faltering economic growth which could see asset quality pressures re-emerge.
International Ratings
Long-Term Short-Term Individual Support Outlook
Bangkok Bank BBB F3 C/D 2 Stable
Krung Thai Bank BBB- F3 D 2 Stable
Kasikornbank BBB F3 C 2 Positive
Siam Commercial Bank BBB F3 C 2 Positive
Bank of Ayudhya BB B D 3 Positive
Thai Military Bank BB+ B D 3 Positive
Bank of Asia BBB F3 C/D 2 Positive
Note: Kingdom of Thailand rating BBB/F3 Positive Outlook
Source: Fitch
Thailand's four largest banks - BBL, KTB, KBANK and SCB - account for about 70% of total system loans and deposits. As such, Fitch believes that even with the likely withdrawal of the central bank's Financial Institutions Development Fund guarantee in the near future, government support for senior
creditors would be forthcoming given these banks' systemic importance to the Thai financial system and economy.
Since the 1997 crisis, the Long-term debt ratings of the major Thai banks have been underpinned by actual or expected government support instead of
reflecting the banks' stand-alone financial strength, which remained poor. Hence, upgrades in the Thai sovereign ratings provided support to higher ratings for the major banks. Fitch now expects the banks' stand-alone financial strength, which is showing stronger signs of improvement, to play an increasing role in determining the Long-term debt ratings of Thai banks.
The lower debt ratings of TMB and BAY indicate their weaker financial position, as well as their smaller size and systemic importance, which result in a lower expectation of support than for the bigger four.
Fitch expects the gradual improvement in the financial strength and the long-term ratings of Thai banks to continue over the next two to three years,
provided economic recovery remains on track.
Analysts
Chaiyapat Paitoon, CFA, Bangkok
+66 2 655 4762
[email protected]
Vincent Milton, Bangkok
+66 2 655 4759
[email protected]
David Marshall, Hong Kong
+852 2263 9911
[email protected] End.