Foreign Partnerships To Be Key Determinant Of Success For Thai Banks The Association of Southeast Asian Nations (ASEAN)’s plan to establish an economic community by 2015 will result in increased foreign competition in the banking industry.

We believe that establishing strategic foreign partnerships will be a key determinant of success for Thai commercial banks in the coming years. Small-sized commercial banks that command a limited market share are in the precarious situation of being left behind by the competition.

On the other hand, Bangkok Bank remains our favourite to outperform its competitors due to its strategic moves in extending its network overseas. We expect the ASEAN’s plan to establish an economic community by 2015 to have a significant impact on Thailand’s banking industry. We note that the Thai government’s protective stance towards the banking industry in previous years has resulted in a lack of foreign competition and encouraged an excessive focus on the domestic market.

This has in turn created technological gaps and undermined the competitiveness of Thai commercial banks in the region. In order to stay competitive, opening up the banking sector to foreign competition is increasingly being accepted as an inevitable choice for Thailand. Meanwhile, commercial banks in Thailand are beginning to establish strategic partnerships with foreign banks to expand into regional countries.

Intense Domestic Competition Driving Banks To Seek Growth Abroad In addition to the prospect of increased foreign competition in the coming years, domestic competition is also driving Thai commercial banks to expand overseas in search of better opportunities and diversify asset risk. Back in December, the Bank of Thailand warned that intense competition in corporate lending could eventually result in a deterioration of credit quality.

This suggests to us that commercial banks could be trying to maintain earnings growth by taking excessive risks, undermining the strength of their balance sheets. From this aspect, the decision to avoid direct competition domestically and diversify overseas appears to be a prudent strategy by commercial banks.

From a strategic perspective, we believe that establishing partnerships with foreign banks will help mitigate the uncertainties of entering into an unfamiliar market. More importantly, partnering with foreign banks that possess a technological advantage will allow Thai commercial banks to close the technological gap with foreign competitors. However, small-sized commercial banks that do not command a significant market share in Thailand will be at a great disadvantage. We note that with little market share to offer their foreign counterparts, small-sized commercial banks are in a precarious position

See complete report Thailand Commercial Banking Report Q3 2011