Bangkok--5 Oct--Moody's
Karolyn Seet, Assistant Vice President, Moody’s Investors Service
Extracted from "Moody's Weekly Credit Outlook", October 5, 2009.
Industrial and Commercial Bank of China’s (ICBC) bid last Thursday for one of Thailand's smallest commercial lenders, ACL Bank, will — for the Thai banking sector generally — further strengthen the trend for tie-ups between local franchises and global institutions.
Such tie-ups aim to leverage the resulting synergies and each party’s respective expertise, so creating a stronger healthier entity. We expect the involvement of new foreign owners to improve corporate governance, risk management practices, quality of service, and product innovation.
Furthermore, from our viewpoint, strategic stake sales to foreign players can act as positive developments for franchise values and enhance the industry’s long-term goals in diversification and market positioning for the local targets.
In addition, foreign banks should reinforce governance standards as we expect them to lead to closer strategic and managerial oversight over each relevant bank’s activities through the subsequent representations of global shareholders on the boards of directors. A degree of liquidity and/or capital support is also likely to be forthcoming, if required. This would be credit positive for the acquired bank.
In this recent case, ICBC — the world’s largest bank by market capitalization — has agreed to buy a 19.3% stake in ACL Bank from Bangkok Bank. In addition, it intends to make an offer for the 30.6% stake held by the Ministry of Finance (MoF). ACL Bank has a less than 1% market share in Thailand.
The Chinese bank has already indicated it is only interested in pursuing a majority stake — 51% or more. Thailand’s Financial Institutions Business Act allows foreign investors to hold as much as 49% of a local financial institution, up from 25%. Currently, foreign banks are able to take extra holdings in under-capitalized banks, but only after they obtain the appropriate authorizations.
Earlier in September, in a separate case, MoF approved the plan of Thailand’s Financial Institutions Development Fund (FIDF) to sell its 47.6% stake in Siam City Bank (SCIB), the system’s seventh-largest bank. There is some market speculation that several global players, especially Canada’s Bank of Nova Scotia, are interested in purchasing the FIDF stake.
Given the strong interest of foreign investors, as well as the government’s willingness to sell its stakes in a number of state-owned entities, the foreign presence in the Thai financial sector will gradually increase. In the medium term, if the price is right, investors are likely to buy the government’s shareholdings in relevant banks.
In view of the uncertain political climate, though, large-scale mergers are, for now, a relatively remote prospect. Consolidation on a large scale, domestic or overseas, is not likely in the near term.
However, strategic tie-ups with global players — aimed at strengthening franchises and market positions — have been common, as illustrated by the acquisitions of: (i) a 33% stake in Bank of Ayudhya by GE Capital International Holdings Corporation; (ii) a 30% stake in TMB Bank by ING Bank; (iii) a 49% stake in Thanachart Bank Public Co Ltd by Bank of Nova Scotia; and (iv) a 93% stake in former state-controlled BankThai by Malaysia’s CIMB Group. BankThai is now known as CIMB Thai.
In the longer term, a further shake-up of the banking sector is inevitable. Fewer and larger banks will help stabilize the financial system as long as the mergers result in well-managed and profitable entities.
Such developments would occur against the backdrop of stricter regulatory requirements from the Bank of Thailand, growing competition between banks, and the strong role of the banking sector in the economy. However, in the interim, we expect regulatory delays to contribute to the lengthy process of obtaining approvals from MoF.
For more information please contact:
Eleanor Sheung
AVP/Communications Strategist, Asia Rating Communications
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+ 852 2916 1154 fax
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