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Moody’s Investors Service says that its outlook for Thailand’s (Baa1 stable) banking system is stable, amid a challenging operating environment.
“Asset quality is likely to deteriorate, given the challenging operating environment and high level of household leverage, but lower interest rates that help borrowers service their loans mean that our central scenario is for only a modest increase in nonperforming loans,” says Alka Anbarasu, a Moody’s Vice President and Senior Analyst.
“Additionally, banks’ reserve coverage and capitalisation levels are high, providing large buffers to absorb losses. Funding conditions and profitability will be stable over the outlook horizon, and we do not expect to change our support assumptions for Thai banks,” adds Anbarasu.
Anbarasu was speaking on the just-released “Banking System Outlook: Thailand,” which is an overview of credit trends affecting the banking system in the next 12-18 months.
The report states that the operating environment for Thai banks will remain challenging as economic recovery will be slower than previously expected due to political uncertainty weighing on consumption and investment; consumption is also constrained by high household leverage.
GDP expansion around 3% expected in 2015
The current military-led government is pushing delayed investment projects forward, and Moody’s expects real GDP expansion of around 3% this year followed by annual growth of around 4% from 2016 to 2018.
Asset quality is likely to deteriorate moderately, as leveraged households and small- and medium-sized enterprises find it difficult to service their high debt levels. However, the Bank of Thailand’s accommodative policy will limit the impact on these borrowers.
Thai banks provisioned heavily in 2012 and 2013 as the Bank of Thailand encouraged them to build countercyclical buffers, lifting the average ratio of reserves to problem loans for rated banks to 146% as of December 2014.
At the end of the first quarter of 2015, the average Tier 1 ratio for Thai banks was 13.0% and total capital adequacy ratio was 16.3%.
Funding and liquidity conditions will remain stable. The loan-to-deposit ratio will remain in a range near 95%-97% as Moody’s expects deposits to keep up with moderate loan growth.
Foreign-currency exposures have increased but remain low
Moody’s estimates that most rated banks already meet the Basel III guidelines for their liquidity coverage ratios.
And lower credit costs and higher non-interest income will support profitability. The ratio of credit costs to total loans should revert to its historical average (around 80-85 basis points for rated banks), given that reserve coverage levels are now high and sufficient for the magnitude of nonperforming loans that we expect. On a pre-provision basis, non-interest income will offset pressure on net interest margin from accommodative monetary policy.
Moody’s support assumptions for Thai banks are unlikely to change over the next 12-18 months; the Thai government will likely have sufficient capacity and willingness to support the banking sector as needed.
Additionally, Thai regulators are not likely to adopt a bail-in regime or a special resolution mechanism that would impose losses on the banks’ senior creditors outside of insolvency proceedings as this is not a policy focus of the Bank of Thailand or the Thai government.
Moody’s rates 12 banks in Thailand. The nine commercial banks represented 91% of commercial banking system assets at end-2014. The three policy banks are classified as specialized financial institutions.