Stocks News Monday February 22, 2021 16:40 —TRIS News Release


The Coronavirus (COVID-19) pandemic has had varying impacts on different types of financial institutions (FIs). Our rating actions for the FI sector in 2020 were mainly on non-bank financial institutions (NBFIs). The rating actions were the result of a material deterioration in operating performance over recent years or a material change in shareholding structure, rather than as a direct impact of COVID-19. While we do not expect the second wave of COVID-19 infections to have a significant immediate impact on rated FIs, it has added uncertainty to the recovery prospects of the domestic economy, which have implications on financial institutions? loan asset quality.

Banks: Robust capital and earnings buffer support ratings

The stable outlook on commercial banks rated by TRIS Rating remains unchanged, despite the financial impact of increased provisions in 2020. Asset quality, although considerably weaker, remains manageable to a large extent, supported partly by the regulatory forbearance announced by the Bank of Thailand (BoT). This is in line with our expectations. Even with the strong rise in credit costs, our stress test suggests the banks? strong earnings buffer and robust capital have created ample room to absorb credit costs before triggering a rating revision.

In 2021 we expect bank credit expansion to decline to a single-digit level from the robust growth in 2020 as debt issuance in the bond market normalizes. While we believe non-performing loans (NPLs) are likely to rise further, provisioning risk should decline as banks have already set aside massive provisions to prepare for significant deterioration in asset quality. We therefore expect banks to report improved earnings in 2021. Meanwhile, banks are flush with excess deposits driven by the cash hoarding behavior of corporates. Although this is positive for their funding and liquidity positions, managing net interest margin could be a challenge.


2020 Rating actions

Within TRIS Rating?s banking coverage, there was only one rating action taken on Thanachart Capital (TCAP, ?A/Stable?) which was previously a bank holding company, the parent of Thanachart Bank (TBANK, ?AA-/Stable?), that underwent a group restructuring after TBANK was acquired by TMB Bank. TCAP?s previous rating (?A+/Stable?) was placed on CreditAlert with negative implication in 2019 and was later downgraded to the current level in 2020. TBANK?s rating, on the other hand, was affirmed. Below is a list of TRIS Rating?s banking coverage (Fig. 1).

Financial performance

Banks were severely affected by the COVID-19 outbreak in 2020

In 2020, the aggregate net profit of nine listed banks (including minority interests) fell by 31% year-on-year (y-y) (Fig. 2) due to massive provisions, a major part of which we believe included management overlays. Total provision expenses of the nine listed banks increased by 40% y-y. Bangkok Bank (BBL) reported the largest drop (Fig. 3) due to significantly lower investment gain and higher operating expenses. TMB Bank?s improved net profit was largely a result of the full-year consolidation of TBANK following the merger of the two banks. Excluding TMB, Kiatnakin Phatra Bank (KKP, rated A/Stable) was the best performer among Thai banks with a 14% decrease in net profit, as provisions were largely offset by strong credit growth and net interest margin (NIM).

Banks? 2021 earnings to improve from lower credit costs despite revenue pressure

For the Thai commercial banks rated by TRIS Rating, we estimate aggregate net profit of THB53 billion in 2021 (+14% y-y). Despite revenue pressure amid a weak domestic economy, we expect earnings improvement to be driven by lower provision expenses in 2021 as shown below (Fig. 4).

In terms of revenue, we expect banks to remain under pressure for the following reasons:

1) Loan growth is likely to be in the single-digit range after the strong growth last year driven by bond market disruption and heightened refinancing risk.

2) Asset yields are still under pressure from low lending rates. Excess deposits are forcing banks to place their liquidity in the low yielding repurchase market and interbank lending as banks are likely to be cautious in lending to the higher-yielding SME sector.

3) Non-interest income could improve from the low base of 2020, but the improvement could be marginal as we expect other fee income to be offset by a potential drop in credit-related fees in line with the expectation of slower credit growth in 2021.

Credit Growth

Strong credit growth in 2020 driven by corporate sector

Outstanding loan assets of the nine banks in aggregate reached THB13.1 trillion at end-2020 (+8% Y-Y). Excluding BBL?s asset growth from the Permata acquisition, KKP, Kasikornbank (KBANK) and Krungthai Bank (KTB) reported strong credit growth in the low- to mid-teen range (Fig. 5). KKP?s credit growth was led by growth in auto hire-purchase lending and corporate loans, whereas KBANK?s credit growth was mainly in the SME and corporate sectors (for liquidity support) and mortgages. KTB?s growth was primarily driven by government-related transactions and loans to state enterprises.

Corporate loan demand in 2020 was exceptionally strong, particularly after the outbreak of COVID-19 that brought disruption to the bond market in late 1Q20 to 2Q20. Large corporates flocked to the commercial banks, drawing down credit lines to preserve cash for liquidity cushions. Anecdotally, the volume of pre-financing loans taken out by property developers rose strongly (Fig. 6). Lending to the SME sector recovered to some extent in 4Q20 after the massive scale-back during 2Q20-3Q20.

Cautiously optimistic in 2021

We project single-digit credit growth in 2021 for the banks we rate. We expect corporate lending to continue leading the growth in loan assets due to low credit risks and the financing need for investments in public infrastructure projects. Even though a large proportion of the borrowers under the debt relief programs have exited the programs with debt repayments normalizing to a large extent, quite a number of borrowers are still vulnerable to the weak economic conditions. We believe banks will likely remain cautious in lending to the SME and retail sectors.

Asset quality

Major banks? NPLs rose substantially in 2020

In 2020, the nine banks? aggregate NPLs or stage-3 loans (excluding interbank) increased by THB75 billion to THB526 billion (+17% y-y). BBL reported the highest increase by THB25 billion, including those of Permata. On a bank-only basis, BBL?s NPLs grew by THB14 billion. For Kasikornbank (KBANK) and Siam Commercial Bank (SCB), NPLs also surged, driven by SME accounts. Among the major banks, only KTB reported a modest increase in absolute NPLs helped by write-offs (Fig. 7).

However, KTB?s NPL formation reflects the same momentum as the other major banks (Fig. 8). For the mid-sized banks, TMB and Bank of Ayudhya (BAY, ?AAA/Stable?), NPLs increased moderately, by about 10%. Higher NPLs reported by some banks, we believe, were mainly due to their SME exposure and conservative risk management policies, where banks restaged part of the loans according to actual risk status rather than taking full advantage of the Bank of Thailand?s (BoT) regulatory forbearance that allows banks to freeze credit status (Appendix A). For BBL, excluding Permata, NPL formation in 2020 is estimated at 0.63%. The smaller banks, on the other hand, ended 2020 with lower NPLs due to better asset quality of auto HP loans. Besides, KKP froze the status of loan accounts and actively managed distressed assets. Combined with strong credit growth, this resulted in the largest drop in NPL ratio for KKP (Fig. 9). Banks also raised loan loss provisions in 2020, a major part of which were for management overlay (excess provisions). This helped the banks maintain strong NPL coverage overall (Fig. 10).

Debt Moratorium

Publicly disclosed information showed that for banks, a major portion of the loans that underwent the debt moratorium since 2Q20 have now resumed normal payments but about half or less still need to be monitored (Fig. 11).

Strengthened provisions

While weak asset quality may linger on in 2021, we believe provisioning risk has declined as many banks have already raised provisions for expected credit loss (ECL) in 2020 (Fig. 12-13). Aggregate provision expenses of the nine listed banks rose 40% y-y to THB241 billion in 2020, which helped preserve loan loss coverage at a high level of 148% at the end of 2020. We project bank credit cost in 2021 to decline from last year.

Strong liquidity and stable funding

Although credit growth in 2020 was strong, deposits have grown faster (Fig. 14). Banks have been faced with excess deposits since late 1Q20, as evidenced by the declining loan-to-deposit (LDR) ratio (Fig. 15). A major reason was the corporates? drawdown of credit lines, which were placed in deposit accounts to preserve liquidity amid bond market disruption. We expect elevated deposits to continue in 1H21 as the economy remains uncertain. At end-2020, deposits at nine listed commercial banks reached THB13.98 trillion (+13% YTD). Current and savings deposits (CASA) accounted for 69% of total system deposits. Liquidity Coverage Ratio (LCR) at the end of November was at 188.7%. While these are positive for banks? funding and liquidity positions, the negative impact will be on net interest margin (NIM).


Capital remains solid

Solid capitalization will continue to be the Thai banks? credit strength. At end-2020, the nine listed banks posted an average core equity Tier 1 (CET-1) ratio of 15.4% with quality of capital (measured by the composition of CET-1 in the total capital) ranging from 71%-94% (Fig. 16). Our stress test on listed banks suggests that credit cost for most banks would need to rise above 200 bps on top of the current level to reach a trigger for rating downgrades.

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