Bangkok--Nov 23--Fitch Ratings
Fitch Ratings today commented that Thai banks’ 2005 results indicate a generally strong performance for most banks, which has been reflected in Fitch’s ratings upgrades across the sector over the last two years. Nonetheless, Fitch notes that the favourable operating environment of the past four years is turning more challenging as rising interest rates and oil prices as well as a decline in business and consumer confidence impacts economic growth in 2006.
The consumer finance sector and new bank entrants face the highest risks as they are likely to suffer from a combination of slower loan growth, funding pressures and rising delinquencies. While the weakening economic momentum could hurt the improving performance of the banking and finance sector in the next year, Fitch believes longer-term economic fundamentals remain solid. In particular, private investment and the government’s infrastructure spending should rise, leading to a pick-up in corporate financing activity, which should in turn help support a continued recovery in banks’ revenues and profitability.
The negative impact of higher funding costs on margins should be mitigated to some degree by rising loan yields and loan growth, although competitive pressures may see margins constrained. While sector impaired loans have declined to about 10% due to debt restructuring and write-offs, the weakening economic environment and rising interest rates may see pressure on loan delinquencies, particularly given Thai banks’ high level of restructured loans. And with liquidity expected to tighten, the proposed deposit insurance scheme is likely to see funding costs and insurance premiums rise further for the weaker banks, although the stronger banks should benefit. Fitch views the limited scheme as positive for the Thai banking sector in the longer-term as it should reintroduce market discipline, adding pressure on Thai banks to improve their financial strength.
Recently released results for the first nine months of 2005 (“9M05”) indicate that the aggregate net profit of the big six Thai banks and two foreign banks’ subsidiaries continue to rise strongly by about 15% from the prior period. This improvement in profitability was mainly the result of strong loan growth, higher fee income, as well as lower provisions and funding costs. This has helped restore the banks’ capital positions.
Among the large Thai banks, Siam Commercial Bank (“SCB”) and Kasikornbank (“KBANK”) continue to report the strongest financial performances, in terms of revenues, profitability and asset quality due to earlier restructuring and stronger middle market and consumer banking franchises. SCB’s adjusted net profit improved about 40% in 9M05. KBANK’s underlying performance also improved strongly with its pre-tax profit rising by about 30%. Bangkok Bank (“BBL”) also reported improved performance with its net profit rising significantly by 33.9% in 9M05 helped by lower funding costs. BBL’s profitability should continue to improve in 2006 with the refinancing of remaining hybrids in late 3Q05 and the Thai Petrochemical Industry restructuring resolution. Krung Thai Bank’s (“KTB”) underlying financial performance also appears to have improved strongly in 9M05 with its adjusted net profit rising by 31%. Fitch notes that KTB has become less aggressive in lending after the Bank of Thailand (“BOT”) required that the bank reclassify its impaired loans in July 2004, which together with a management shake-up and tighter risk controls should help sustain its improved performance.
TMB Bank’s (“TMB”) financial performance has been affected by the merger integration with Industrial Finance Corporation of Thailand (“IFCT”) and DBS Thai Danu Bank (“DTDB”), although the bank’s underlying performance should gradually improve once its operations start to stabilise after the completion of the integration. Bank of Ayudhya’s (“BAY”) performance also continues to improve on the back of loan growth but it still faces provisioning risks, due to weak reserve coverage. Standard Chartered Bank (Thai) (“SCBT”) reported strong revenues, profitability and robust asset quality, although its high exposure to the volatile consumer finance sector could see loan delinquencies rise. Bank of Asia (“BOA”) reported weaker profitability in 2005 as the bank’s operations were affected by the ownership change from ABN AMRO to United Overseas Bank (“UOB”) and the ongoing integration between BOA and UOB Radanasin (“UOBR”), which is scheduled for completion by end-2005, although its performance is expected to improve in 2006.
Contact: Chaiyapat Paitoon, Vincent Milton, Bangkok +662 655 4762/4759; David Marshall, Hong Kong +852 2263 9963
Disclosure: Kasikorn Asset Management Company Limited (of which KBANK holds 71.4%) owns 10% of the shares in Fitch Ratings (Thailand) Limited. TISCO Asset Management Company Limited (of which TISCO Bank holds 99.9%) owns 10% of the shares in Fitch Ratings (Thailand) Limited. No shareholder, other than Fitch Ratings Limited of the United Kingdom, is involved in the day-to-day operation of, or credit rating reviews undertaken by, Fitch Ratings (Thailand) Limited.
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