thegreglowe.com

By GREG LOWE
IN BANGKOK

DETERIORATING asset quality is becoming a serious issue for Thailand’s commercial banks, according to new central bank figures, but analysts say the sector can face down the recession due to its strong fundamentals.

Bank of Thailand figures for the last quarter showed that re-entry non-performing loans (NPLs) – failed loans that became NPLs again after restructuring – accounted for more than half of the 38 billion baht (S$1.63 billion) of loans that turned bad in the commercial banking sector.

Analysts said this was an increase to 1.4 per cent of total loans from a five- year average of 0.9 per cent.

The sector’s gross NPLs in the fourth quarter of 2008 fell to 5.62 per cent of total loans, or 385 billion baht, down from 6.46 per cent in the previous quarter. Debt restructuring represented more than half of the reduction.

‘Asset quality is a major concern for Thai banks during the economic recession, especially in the manufacturing sector, which accounted for over 20 per cent of the net increase in loans during the last two years,’ said Worawat Saisuphatphol, banking and finance analyst at KGI Securities (Thailand). ‘The 4Q08 NPL numbers recently released by Bank of Thailand showed some early warning signs in this segment.’

Manufacturing accounted for 37.1 per cent of all NPLs, followed by commerce (15.3 per cent), personal consumption (13.8 per cent) and real estate (12.3 per cent). More than half of the re-entry NPLs were in the export-dependent manufacturing sector.

The significant growth in re-entry NPLs was in part related to local regulatory practices which do not rigorously penalise banks for restructuring debt.

Analysts expect asset quality to deteriorate throughout the year as the global economy continues to slump, but NPL growth will be more modest than in other markets.

Thai banks saw an average loan growth of 2 per cent per annum over the past two years, compared to average GDP growth of around 7 per cent.

The banks have a relatively comfortable buffer due to their average Tier 1 capital – the core measure of a bank’s financial strength and liquidity – of around 11 per cent.

Ratings agencies said NPLs will grow this year, but the extent is dependent on the overall economic performance. The greatest risk sectors are the export-related industries, construction and personal consumption.

‘We believe the banking sector’s fundamentals are sound and risk management has improved in recent years but it is not immune from the global fallout,’ said Paul Clarkson, director, financial institution ratings, at Standard and Poor’s.

The effects of the Bank of Thailand’s interest rate cuts last week will be modest, said Vincent Milton, managing director, financial institutions, Fitch Ratings Thailand. ‘The reduction in rates is probably of limited benefit to the banks given the rising pressures on liquidity and the severe contraction in GDP which will likely result in a significant fall in loan growth and a sharp increase in NPLs over the course of 2009.’

Published March 2, 2009
© The Business Times