Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance

Primary Credit Analyst: Deepali V Seth Chhabria, Mumbai (91) 22-3342-4186; deepali.seth@standardandpoors.com Secondary Contact: Cheul Soo Cho, CFA, Hong Kong (852) 2533 3559; cheulsoo.cho@standardandpoors.com

Table Of Contents
Political Unrest, A Sluggish Economy, And High Household Debt Could Hurt Asset Quality Stiff Competition And High Credit Costs Should Have Little Effect On Earnings Capitalization And Funding Should Remain Largely Unchanged Banking Sector Stability Will Persevere Related Criteria And Research

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Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance
Political developments in Thailand in the past few months have precipitated a drop in the Thai baht and a fall in the stock market, and slowed economic activity. Standard & Poor's Ratings Services expects these conditions to result in rising loan delinquencies, tighter bank margins, and a decline in loan growth. The extent of these effects would, however, depend on the severity and duration of the political unrest. We believe political protests in Thailand could hurt business sentiment and consumer confidence while further pushing back structural reforms and government infrastructure spending. This could, in turn, delay private and public-sector investments. Consumer demand could also slow as consumers put off non-essential purchases. We expect bank credit growth to slow to 8%-10% in 2014. Ironically, this could help the economy and the banking sector because Thailand's rapid credit growth in the past few years was leading to a buildup of economic imbalances. Overview Political uncertainty in Thailand and high household debt could make the operating environment tougher for Thailand's banks, in our view. However, we do not expect this to significantly impair banks' asset quality and earnings in 2014. In addition, banks' capitalization and funding are likely to remain stable during the year. We maintain our stable outlook on Thailand's banking sector.

Political Unrest, A Sluggish Economy, And High Household Debt Could Hurt Asset Quality
We expect nonperforming loans (NPLs) and delinquencies in the Thai banking industry to increase gradually in the next 12 to 24 months. Our view is largely based on the political situation, a slowing economy, and rising household debt. Prolonged political protests could hamper normal business operations and hurt corporate performance, leading to a significant slowdown in the economy. This would be particularly true for small and midsize enterprisessegments which are the first to be hit by a slowdown. Public confrontation between the two major political factions in Thailand re-emerged in November last year following the government's push to enact an amnesty bill. The political unrest and growing economic uncertainty has also led to a depreciation in the Thai baht, which dropped by about 6% in the three months ending Jan. 31, 2014. Any increase in the severity and duration of the protests also risks hurting the country's vital tourism sector. Rising household debt, which the rapid loan growth of the past few years fueled, could expose banks' to an increasing

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Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance

risk of customer default, in our opinion. Thailand's household debt increased to 77% of GDP in 2012 from 55% in 2007, which we view as significant given the country's low income. Thailand's household leverage is now comparable with that of Singapore and Malaysia (see chart 1), countries whose income levels are significantly higher than Thailand's. The ratio of household debt to average annual income rose to 1.22x in 2012 from 0.97x in 2009. Such high leverage has made households more vulnerable to rising interest rates and economic slowdown, especially if unemployment rises. Moreover, competition among financial institutions to lend to households is particularly aggressive. High household leverage and aggressive underwriting have started to lead to higher NPLs and delinquencies (see chart 2), especially in the used-car category, where car prices fell sharply. Delinquent car loans rose 100 basis points to 7% in the first nine months of 2013, compared with a stable delinquency ratio of 2.2% for the entire loan book. Similarly, the NPL ratio for car loans increased by 40 basis points to 1.8%, while the NPL ratio for the overall loan book declined by 10 basis points.
Chart 1

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Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance

Chart 2

On the positive side, the depreciation in the baht and an improvement in the global economy could boost the performance of exporters and export-oriented companies in Thailand. Moreover, we understand that banks have recently tightened underwriting standards in the consumer segment, and this should limit the rise in NPLs. Overall, we expect NPLs to remain manageable despite increasing.

Stiff Competition And High Credit Costs Should Have Little Effect On Earnings
We anticipate that the Thai banking industry's return on average assets could decline slightly in 2014, because of lower margins and lending-related fee income and high credit costs. Slowing loan growth could lower lending-related fee income. Margins are also likely to decline slightly due to a slowing economy and rising competition. Banks as well as nonbank financial institutions--particularly specialized ones--are competing aggressively to lend to households. But, we do not expect banks to sharply slash interest rates, so the pressure on earnings should be limited. We expect credit costs for the banking industry to remain high because of a likely deterioration in asset quality measures. Credit costs have already been high for a few years now because banks had beefed up their reserves (see chart 3), and coverage ratios had improved substantially. Therefore, we do not expect credit costs to increase further.

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Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance

Chart 3

Capitalization And Funding Should Remain Largely Unchanged

With the slowdown in credit growth, we expect Thai banks' capitalization and funding and liquidity profiles to remain stable. We project the average risk-adjusted capital (RAC) ratio before diversification for rated banks to be about 6.4% on Dec. 31, 2014. This is lower than RAC ratios for banks in the peer banking systems of Singapore and Malaysia. Highly stable core customer deposits will continue to account for a large portion of the banking system's total funding, keeping banks' dependence on external funding low.

Banking Sector Stability Will Persevere

We recently revised our banking industry country risk assessment for Thailand to '6' from '5' to reflect our view that economic risks for banks in the country have risen. Consequently, we also lowered our projections for the RAC ratio for all the banks we rate in Thailand because we calibrate the risk weights for our RAC ratio to the underlying economic risk in the country. Thailand's banking industry has been growing aggressively for the past three years, outpacing nominal GDP by a wide margin. We believe such growth has resulted in a build-up of economic imbalances.

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Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance

Already high public-sector and household debt exacerbate these risks. Our outlook on Thailand's banking sector remains stable. Although we expect bank's financial performance to weaken in 2014 due to higher economic risk, we have already factored this deterioration into our recent rating actions on Thai banks (see our report "SACPs Of Two Thai Banks Lowered On Rising Economic Risk; Ratings Affirmed With Stable Outlook," published on Dec. 6, 2013). That said, our base-case projections do not factor in prolonged or severe political unrest, which could harm the banking system.
Table 1

Key Indicators Of Selected Thailand Banks

Gross Net nonperforming nonperforming assets/customer assets/customer Reported loans + other loans + other Tier 1 Gross NPL real estate real estate capital ratio (%) owned (%) owned (%) (%)

Return on average assets (%)

Customer loans (net) /customer deposits (%)

Stand-alone credit Issuer rating profile 2013 2012 2013 2012 Bangkok Bank Public Co. Ltd. Bank of Ayudhya Public Co. Ltd. KASIKORNBANK PCL Krung Thai Bank Public Co. Ltd.* Siam Commercial Bank Public Co. Ltd. TMB Bank Public Co. Ltd. United Overseas Bank (Thai) Public Co. Ltd. BBB+/Stable/A-2 BBB+/Stable/A-2 BBB+/Stable/A-2 BBB/Stable/A-2 BBB+/Stable/A-2 bbb bb+ bbbbb+ bbb1.43 1.26 1.89 1.42 2.10 1.46 1.47 1.86 1.12 1.95 2.20 2.59 2.11 2.58 2.14 2.30 2.39 2.16 3.19 2.13

2013 N.A. N.A. 7.94 N.A. 4.40

2012 8.71 5.23 8.62 8.67 4.51

2013 N.A. N.A. 5.00 N.A. 0.98

2012

2013

2012

2013 85.89

2012 82.80

3.52 14.40 11.86

1.59 11.10 10.94 118.67 116.37 5.54 12.57 10.43 5.34 10.17 10.21 1.21 11.90 10.60 91.32 87.69 91.89 92.26 88.39 92.67

BBB-/Stable/A-3 BBB+/Stable/A-2

bb+ bb-

0.78 0.79

0.22 0.67

3.87 1.75

4.10 2.10

N.A. 7.34

N.A. 7.75

N.A. 4.75

N.A.

10.62 11.10

88.37

86.23

5.46 14.90 14.39

98.98 103.00

*Reported gross NPL (%) is on unconsolidated basis. 2013 data is for six months ended June 30, 2013. N.A.--Not available.

Table 2

Banking Industry Country Risk Assessment

Country Government support Thailand Highly supportive BICRA group Anchor rating Group 6 bb+

Economic risk factors and descriptors Economic risk Economic resilience Economic imbalances 7 High risk Intermediate risk

Industry risk factors and descriptors Industry risk 4

Institutional framework Intermediate risk Competitive dynamics Systemwide funding High risk Low risk

Credit risk in the economy Very high risk

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Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance

Related Criteria And Research

Related Research
Banking Industry Country Risk Assessment: Thailand, Dec. 26, 2013 What Revising Our BICRA Score For Thailand Means For Its Banks, Dec. 6, 2013 SACPs Of Two Thai Banks Lowered On Rising Economic Risk; Ratings Affirmed With Stable Outlook, Dec. 6, 2013 Rising Household Debt Could Weigh Down Asia's Banks, Oct. 28, 2013

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