The FINANCIAL — Fitch Ratings said on March 31 that Thai banks' results in 2007 were impacted by higher provisioning under new regulatory rules, as well as a slowdown in the domestic economy arising from the political uncertainty following the September 2006 coup.
Banks with lower levels of reserves were impacted the most, with significant losses reported by some banks – notably TMB Bank Public Company Limited (TMB) which was recapitalised at end-December 2007 with a capital injection from ING Bank NV (rated 'AA'). Barring further economic or political shocks, lower provisioning and higher loan growth should see stronger results in 2008 for the Thai bank sector.
"The profitability of the system was poorer in 2007, although the stronger banks continued to perform well, namely Siam Commercial Bank Public Company Limited (SCB), Kasikornbank Public Company Limited (KBANK) and Bangkok Bank Public Company Limited (BBL) – each rated 'BBB+'," said Vincent Milton, Managing Director of Fitch's Thai office and Senior Director of Financial Institutions. Of note, despite the weaker economic sentiment, these three largest private banks have accelerated lending, particularly to the consumer and medium size business segments. "The outlook for 2008 should be brighter, as the provisioning burden is lifted and consumption and investment spending by Thai consumers and businesses pick up. Nonetheless, the operating environment remains challenging and credit and market risks have heightened as a result of the global financial shocks witnessed in recent months," added Mr. Milton. The main concerns related to these shocks so far, have been direct exposure to collateralised debt obligations (CDOs) and other structured investments as well as funding risks arising out of a flight of confidence by depositors and creditors.
In Fitch's view, the major Thai banks are generally well positioned to withstand these credit and liquidity shocks. BBL, Krung Thai Bank Public Company Limited (KTB) and Bank of Ayudhya Public Company Limited (BAY) have limited exposure to CDOs, accounting for less than 6% of equity, although Fitch expects these banks to report further mark-to-market losses in 1Q08. Bankthai (Support Rating '4'), one of the smaller banks, which was again forced to raise capital in early 2008 due to potential severe losses on its subprime and CDO investments, is the only Thai bank to be affected significantly from the fallout in the US structured markets. The Thai banks have limited reliance on offshore funding and their domestic deposit and wholesale funding have not been significantly affected by the turmoil in offshore markets.
Contagion to the domestic financial system, to date, appears limited, although high energy prices, local currency appreciation and a US recession will likely impact Thailand's economic growth in 2008. Nonetheless, increased government infrastructure spending and private capital expenditure, as well as a rebound in consumption should help offset slower export growth to maintain GDP growth at about 5%. The banks are expected to accelerate the clean up of their remaining legacy bad loans from the 1997 crisis, with sector impaired loans projected to fall to below 5% by year-end. This could see further losses on asset disposals, but Fitch views that the major Thai banks are now well capitalised to absorb such losses, supported by their positive earnings growth. The agency notes, however, that the implementation of Basel 2 will see a moderate decline in capital ratios for the sector by year-end. Fitch expects SCB, KBANK and BBL to continue to report solid financial results, while BAY, TMB and KTB should report a marked improvement in performance in 2008 due to lower provisioning and stronger loan growth. The rating outlook on Thai banks is generally stable, although selective upgrades are possible.
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