Thailand Banking Sector

Outlook

Geeta Chugh
Senior Director and Analytical Manager
Financial Institutions Ratings, Emerging Asia

September, 2014

Permission to reprint or distribute any content from this presentation

requires the prior written approval of Standard & Poors. Copyright 2014
by Standard & Poors Financial Services LLC. All rights reserved.
 Agenda
Banking Industry Country Risk Assessment Thailand Vs Asia Pac

Political Unrest, A Sluggish Economy, And High Household Debt Pose Challenges

We expect nonperforming loans (NPLs) and delinquencies in the Thai banking

industry to increase gradually in the next 12 to 24 months

Earnings To Sustain Despite High Credit Costs

Sufficient Risk Adjusted Capital for Rating Category

Funding and Liquidity Stable

Banking Sector Stability Will Persevere

Key Risk Factors For FIs Elsewhere in Asia

Source: Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance published on Feb.11, 2014
Thailand Banking Industry
Country Risk Assessment
Banking Industry Country Risk Assessment Thailand Vs
Asia Pacific

Economic Risk
10

9 Cambodia
Papua New
Mongolia
Guinea,
8 Vietnam
Sri Lanka

7
Thailand Philippines Indonesia

6
China

5 Malaysia India

Korea
4
Brunei

Singapore
Taiwan
3
Hong Kong
New Zealand

2 Australia Japan

1
1 2 3 4 5 6 7 8 9 10

Industry Risk

Source: Banking Industry Country Risk Assessment Update: August 2014

Banking Industry Country Risk Assessment Thailand

Source: Banking Industry Country Risk Assessment: Thailand published on Dec 26, 2013

5
Banking Industry Country Risk Assessment Thailand
Trends on Risk Factors

We view the trend for economic risk as stable.

Political uncertainty if persists could affect near-term economic growth and the trends for loan growth
and property prices
Underdeveloped infrastructure and delayed structural reforms pose further constraints, in our opinion
High leverage for both household and corporate sectors and further economic imbalances building
up could expose banks to the risk of an increase in credit losses in a slowing economy
On a positive note, Thai banks have low sector concentration, particularly to high risk sectors

We expect the industry risk to remain stable for the next couple of years
We think that the institutional framework and competitive dynamics will stay stable over the next few
years
Additionally, while we do not expect a sustained deterioration in the sector's funding profile over the
next two to four years, we note that a potential weakness in systemwide funding is emerging
Industry risks for banks operating in Thailand could increase because of the sector's weaker funding
profile, if loan growth remains high and deposit growth is unable to match the pace

Source: Banking Industry Country Risk Assessment: Thailand published on Dec 26, 2013

5
BICRA Heat Map Comparison Of Thailand With Other Key
Global Systems
Economic Risk Factors and Descriptors Industry Risk Factors and Descriptors
BICRA Economic Economic Credit risk Economic Institutional Competitive Systemwide Industry
Country
Group Resilience Imbalances in Econ. Risk Framework Dynamics Funding Risk
Switzerland 1 Very Low Very Low Low 1 Low Low Low 2
Australia 2 Very Low Interm. Low 2 Very Low Very Low Interm. 2
Canada 2 Very Low Interm. Low 2 Very Low Low Low 2
Germany 2 Very Low Very Low Low 1 Interm. Interm. Very Low 3
Hong Kong 2 Very Low High Low 3 Very Low Low Very Low 1
Japan 2 Low Low Low 2 Interm. Interm. Very Low 3
Singapore 2 Very Low High Low 3 Very Low Low Low 2
France 3 Low Interm. Low 3 Low Interm. Low 3
New Zealand 3 Very Low Interm. Interm. 3 Low Low High 4
United States 3 Very Low Interm. Interm. 3 Interm. High Very Low 4
United Kingdom 3 Very Low Interm. High 4 Interm. Interm. Low 3
Korea 3 Interm. Low High 4 Interm. Interm. Low 3
Malaysia 4 High Low High 5 Interm. Interm. Low 3
Taiwan 4 Interm. Low Interm. 3 Interm. Very High Very Low 5
Brazil 5 High High Interm. 6 Interm. High Interm. 5
Italy 5 High Interm. High 6 Interm. Interm. High 5
India 5 High Low High 5 High High Low 5
China 5 Interm. High High 6 High High Very Low 5
Thailand 6 High Interm. Very High 7 Interm. High Low 4
Spain 6 Interm. Very High High 7 Interm. Interm. High 5
Philippines 7 Very High Low Very High 7 Very High Interm. Interm. 6
Indonesia 7 Very High Interm. Very High 7 Very High High Interm. 7
Russia 7 High Interm. Very High 7 Very High High High 7
Sri Lanka 8 Very High High Very High 8 Very High High High 7
Vietnam 9 Very High High Ext. High 9 Ext. High Very High Interm. 8
Mongolia 9 High Very High 9 Ext. High High Very High 9
Ext High
Cambodia 9 Ext. High Interm. Ext. High 9 Ext. High High Very High 9
Greece 10 Very High Very High Ext. High 10 High High Ext. High 8

Source: Banking Industry Country Risk Assessment Update: August 2014

Political Unrest, A Sluggish
Economy, And High Household
Debt Pose Challenges
Political Uncertainty Has Hurt Economic And Bank Credit
Growth
GDP growth (%) - Left axis Credit Growth (%) - Right axis
7.8%
8.0% 16.0%
14.9%
13.7%
6.5%
6.0% 12.0%
11.0%
11.3%
8.0%
4.0% 8.0%
2.9%

2.0% 4.0%
1.1%
0.1%
0.0% 0.0%
2010 2011 2012 2013 2014f

The recent political uncertainty has constrained economic growth and bank lending growth

Although the military imposed martial law in May, it insisted that it was not trying to usurp power
from the civilian government, which remains in place

In our view, the army's action could help stabilize the situation by forestalling a potential violent
conflict between opposing sides and by bringing the protagonists together to negotiate an interim
solution so that another election can take place

Nevertheless, the growing political instability over the past half a year has taken a toll on
consumption and investment, depressing near-term growth prospects
Source: Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance published on Feb.11, 2014
Ratings On Thailand Affirmed At 'BBB+/A-2' And 'A-/A-2'; Outlook Stable, May 22, 2014
Note: 2014 Credit growth number is the YOY growth for the period ending June 2014
Economic Growth Dependent On Interest Rate Cut And
Improvement In Global Economy
% Policy Rates (%) - Left axis USD/THB - Right axis

3.5 33.0

3.0 32.2

2.5 31.4

2.0 30.6

1.5 29.8

1.0 29.0
2010 2011 2012 2013 Mar-14 Aug-14

An improvement in the global economy could boost the performance of exporters and export-
oriented companies in Thailand

Central bank cut its policy rate to a three year low to boost spending after economic growth dropped
sharply in 2013
Source: Central Bank website and Oanda
Thailands Household Debt Has Risen Sharply
Household Debt to GDP (%)
90%

80%

70%

60%

50%
2008 2009 2010 2011 2012 2013

Malaysia Thailand* Singapore Hong Kong

Rising household debt could expose banks' to an increasing risk of customer default

Household leverage is comparable with that of Singapore & Malaysia, countries with significantly
higher income levels than Thailand

Competition among financial institutions to lend to households has been particularly

aggressive

Households now more vulnerable to increase in interest rates and economic slowdown, especially if
unemployment rises
Source: Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance published on Feb.11, 2014 and Central Bank
data
Thailand And Malaysia Are The Most Vulnerable In Asia
Consumer Loans in Thailand Have Shown More Stress
% Nonperforming loans Delinquencies
9.0

8.0

7.0 3.2

6.0
2.7
5.0
3.1
3.5
4.0 1.9 3.5
2.7 3.2
1.9 2.8 2.0
3.0 2.0
5.3
2.0 4.0
3.1 3.0
2.3 2.4 2.1 2.2 2.2 2.5
1.0 2.0 1.9

0.0
Corp. Cons. Corp. Cons. Corp. Cons. Corp. Cons. Corp. Cons. Corp. Cons.

2009 2010 2011 2012 2013 June 2014

Car loans witnessed the maximum stress with NPLs at 2.3% and Delinquencies at 8.2% of total
loans at end-June 2014

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 upward trend

Source: Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance published on Feb.11, 2014, Central Bank
Delinquencies refers to special mention loans or past due loans over one month but not over three months
Political Unrest, A Sluggish Economy, And High
Household Debt Could All 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.

Political developments in Thailand in the past few months have led to volatility in the Thai baht and
the stock market, and slowed economic activity. Prolonged political protests could hamper normal
business operations and hurt corporate performance, particularly the SME sector. Any increase in
the severity and duration of the protests also risks hurting the country's vital tourism sector.

Household debt has also increased sharply and is now comparable with that of Singapore and
Malaysia, countries whose income levels are significantly higher than Thailand's.

All these conditions could result in rising loan delinquencies. However, recently tightened
underwriting standards in the consumer segment should limit the rise in NPLs. Overall, we expect
NPLs to remain manageable despite increasing.

Source: Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance published on Feb.11, 2014
Earnings To Sustain Despite High Credit Costs
Thai Banks Reserves Have Increased

We anticipate that the Thai banking industry's return on average assets could remain range bound
constrained by continuing high credit costs and lending related fee-income.

Banks unlikely to sharply slash interest rates, so earnings pressure should be limited

Likewise, Credit costs have already been high for a few years now because banks had beefed up
their reserves, and coverage ratios had improved substantially. Therefore, we do not expect any
further increase in credit costs unless the operating environment deteriorates sharply
Source: Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance published on Feb.11, 2014
Sufficient Risk Adjusted Capital For Rating Category

Risk- Adjusted Capital for Rated Thai Banks (%)

10

0
Bangkok Bank Bank of Ayudhya Kasikornbank Krung Thai Siam Comm TMB UOB Thai
Note: The risk weights are adjusted to reflect the current BICRA and economic risk score for Thailand
Sources: Company data as of Dec. 31, 2012, Standard & Poor's.

8
Funding And Liquidity Should Remain Largely
Unchanged
We expect funding and liquidity profiles to remain stable in the scenario of moderate credit growth

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.

Deposits cost could rise as the competition intensifies post reduction in deposit guarantee ceiling

Deposit Protection Agency contemplating reducing the ceiling to 25 million baht per depositor
by August 2015 and to 1 million from August 2016

This could result in heightened competition amongst banks, though we expect stronger
banks to benefit

Smaller and weaker banks profile could get further impacted if depositors insist on higher risk
premium

Source: Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance published on Feb.11, 2014
Banking Sector Stability Will Persevere

Our outlook on Thailand's banking sector remains stable.

Although we expect bank's financial performance to weaken due to higher
economic risk, we have already factored this deterioration into our recent
rating actions on Thai banks
Late last year, we 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
That said, our base-case projections do not factor in prolonged or severe
political unrest, which could harm the banking system

Source: Thailand Banking Outlook 2014: Political Uncertainty Could Cast A Shadow On Banks' Performance published on Feb.11, 2014
Credit Profile Of S&P Rated Thai Banks
Bank Name Bangkok Bank Bank of Ayudhya Kasikorn Krung Thai Siam Comm TMB United Overseas

ICR (Long Term) BBB+ BBB+ BBB+ BBB BBB+ BBB- BBB+

SACP bbb bb+ bbb- bb+ bbb- bb+ bb-

Anchor bb+ bb+ bb+ bb+ bb+ bb+ bb+

Economic Risk 7 7 7 7 7 7 7

Industry Risk 4 4 4 4 4 4 4

Business Position Strong Adequate Strong Adequate Strong Adequate Moderate

Capital and Earnings Adequate Moderate Moderate Moderate Moderate Moderate Adequate

Risk Position Adequate Adequate Adequate Adequate Adequate Adequate Adequate

Funding Above Average Average Average Average Average Average Below Average

Liquidity Strong Adequate Adequate Adequate Adequate Adequate Adequate

Sovereign Tendency to support Private

Highly Supportive Highly Supportive Highly Supportive Highly Supportive Highly Supportive Highly Supportive Highly Supportive
sector FI

Systemic Importance High High High High High Moderate Low

Likelihood of Gvt Support High High High High High Moderately high Low

Parent Support No Highly Strategic No No No No Core

Source: Standard & Poors

13
Thai Bank Ratings Relative To Asia Pacific Peers

Issuer Rating SACP

Rating
RatingDistribution
Distribution
forfor
Asia
Asia
Pacific
Pacific
Banks
Banks
(%)
Bangkok Bank Public Co. BBB+/Stable/A-2 35
Ltd. axA+/--/axA-1 bbb

30
Bank of Ayudhya Public BBB+/Stable/A-2
Co. Ltd. axA+/--/axA-1 bb+

25
BBB+/Stable/A-2
KASIKORNBANK PCL. axA+/--/axA-1 bbb-
20
Krung Thai Bank Public Co. BBB/Stable/A-2 axA/--
Ltd. /axA-2 bb+
15

Siam Commercial Bank BBB+/Stable/A-2

Public Co. Ltd. axA+/--/axA-1 bbb- 10

BBB-/Stable/A-3
TMB Bank Public Co. Ltd. axA-/--/axA-2 bb+ 5

United Overseas Bank BBB+/Stable/A-2 0

(Thai) Public Co., Ltd. axA+/--/axA-1 bb-

Source: Standard & Poors

Key Risk Factors For FIs In Asia
We expect Asia-Pacific banks to face challenges in maintaining asset quality
Slower growth and tightening monetary conditions in China
More volatile foreign exchanges and interest rates caused by US tapering

Vulnerabilities expose some countries more than others

Structural issues such as overcapacity of some industries ( China, Korea, India, and
Japan)
High household debt aiding economic imbalances (Malaysia, Thailand, Korea, and
Singapore)
High/Rising property prices (China, HK, Malaysia, Australia, New Zealand)

Impact - Increased pressure on asset quality and earnings

That said, we do not foresee an increase in negative rating actions in the

next year. We expect major banks in Asia-Pacific to retain strength.

Source: Asia-Pacific Credit Outlook 2014: A Sigh Of Relief As Growth And Market Risks Subside, Dec 10, 2013
21
Key Related Research
Research Update: Ratings On Thailand Affirmed At 'BBB+/A-2' And 'A-/A-2'; Outlook Stable,
May 22, 2014

Bulletin: Dismissal Of Thailand's Prime Minister Is Credit Negative, But Rating Not Affected,
May 8, 2014

Sovereign Defaults And Rating Transition Data, 2013 Update, April 18, 2014

Thailand's Rice Support Scheme Highlights Policy Risk But Won't Hurt The Sovereign Rating,
March 12, 2014

Election Woes In Bangladesh And Thailand Raise Risk But Don't Yet Undermine Sovereign
Ratings, Feb. 18, 2014

22
 Thank You

Geeta Chugh
Senior Director and Analytical Manager
Financial Institutions Ratings, Emerging Asia

T: 91-22-3342-1910
Geeta.Chugh@standardandpoors.com

Permission to reprint or distribute any content from this presentation requires the prior written approval of
Standard & Poors. Copyright 2014 by Standard & Poors Financial Services LLC. All rights reserved.
14
Copyright 2014 by Standard & Poors Financial Services LLC. All rights reserved.

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