Bidding up: last month Thanachart Bank, 49% owned by Canada's Bank of Nova Scotia, saw off HSBC to win control of Siam City Bank in a government auction

Ongoing financial reform will not be held back by Thailand's political troubles, say Thailand's bankers. Neither portfolio nor direct investment inflows have been impacted, and the country's government is pressing on with two masterplans for the financial sector and capital markets. Writer Brian Caplen

In Thailand, demonstrations and the reform agenda carry on side by side. Last month's protests against the government of prime minister Abhisit Vejjajiva may have caught the international headlines but they did nothing to deter investors who have faith in the administration's market-friendly approach.

It undoubtedly helps that the Thai finance minister, Korn Chatikavanij, is a former investment banker and his instincts are to promote competition, the free movement of capital and efficient markets. All the same, for many governments this would be the time to lay low and hold off on new measures until the political storm had passed.

But in Thailand, bankers talk about 'when' not 'if' the political troubles are sorted out, so that the country can finally realise its full growth potential. In mid-March, as protests by the red-shirted supporters of former prime minister Thaksin Shinawatra became ever more audacious - coming on the heels of a Thai court decision to seize a proportion of his frozen assets - the Thai baht hit a high against the dollar, and the index of the Stock Exchange of Thailand (SET) continued its upward ascent.

Neither portfolio nor direct investment inflows have been impacted by the political crisis. In mid-March, Thanachart Bank, 49% owned by Canada's Bank of Nova Scotia, saw off HSBC to win control of Siam City Bank in a government auction. This came a few months after the agreement to let the Industrial and Commercial Bank of China purchase a smaller bank called ACL, which, like Siam City, came into government hands during the 1997 Asian financial crisis.

At the same time, the government is pressing on with its reform agenda which includes the Financial Sector Master Plan II (FSMPII) and the Capital Markets Development Master Plan (CMDMP). The FSMPII aims to open up the financial sector to more foreign competition as well as promoting greater financial access to about 10% of the country's population that remains unbanked. There are also initiatives to upgrade risk management systems - even though Thailand has come through the current financial crisis relatively unscathed - and to reduce costs by getting non-performing loans (NPLs) off the books.

The CMDMP aims to liberalise Thailand's securities business by demutualising the SET, streamlining the tax systems and the legal framework and establishing a national savings fund to increase the investor base. The goal is to increase Thailand's market capitalisation-to-GDP ratio from 86% (2008 figure) to 130% by 2013. Thailand has not been deterred in these liberalisation efforts by the soul-searching that is going on internationally over whether a pure markets philosophy can always deliver stability.

Chartsiri Sophonpanich, president of Bangkok Bank, says: "Thai banks have come a long way from where we were when we faced the crisis in 1997 and had to run at a minimum level of capital. [Thai banks now have high capital ratios and Bangkok Bank's is 16.45% with a Tier 1 of 13.5%.] We are looking forward to the prospect of growth and once we [Thailand] sort out our internal problems [the political crisis] I think the outlook for the country is strong."

Mr Chartsiri says that, while a high capital base is advantageous for keeping banks safe, it also allows them to grow as the market expands. Bangkok Bank already has extensive regional operations and he says that barriers to the integration of the ASEAN capital markets, such as exchange control, will naturally disappear as countries become more wealthy.

Good report

Bangkok Bank reported a stable net profit of Bt20bn ($615m) in 2009, up 0.02% on the previous year, helped by economic recovery in the fourth quarter following the downturn. NPLs fell from Bt54.6bn to Bt53.8bn, giving a ratio to total loans of 4.4%. As part of its regional push the bank formed Bangkok Bank (China), a wholly owned subsidiary, out of four branches it had in the country which should give the bank scope for further expansion.

Kittiya Todhanakasem, senior executive vice-president of the financial management group for state-owned Krung Thai Bank, shares the view that much was learnt by the Thai banks in the Asian crisis.

"As Thailand went through such a painful experience in the Asian crisis, the business community subsequently adopted a more prudent approach," she says.

"On the real estate side, for example, as soon as developers here heard about the US subprime situation they scaled down their projects and sold developments to others with more cash flow. The banks were also fairly cautious.

"If we [in Thailand] could just put things on hold on the political side, on the economic side this year is much brighter than last year. This time last year we were all a bit gloomy but it came out better than we expected."

Krung Thai, which won The Banker's 2009 award for Best Bank in Thailand, saw its deposits grow by 13.6% last year improving the loan-to-deposit ratio. NPLs decreased from 7.6% to 6.5%. The capital adequacy ratio increased from 13.08% to 15.93% and Tier 1 from 9.7% to 10.03%. The bank has targeted a 6% to 7% increase in loans and deposits and a 15% increase in fee income in 2010.

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Chartsiri Sophonpanich, president of Bangkok Bank

Lending power

Krung Thai is one of the banks best placed to fulfil the aim of the FSMPII for increasing financial inclusion. The bank assists Thai villages in handling government funds by providing training and software to operate microfinancing. It is also a large lender to co-operatives, providing them with a banking counter to facilitate deposits and withdrawals of funds.

The leading Thai banks are sanguine about the prospects of increased competition. Mr Chartsiri says: "More foreign competition is inevitable. The Thailand experience will be no different from what has happened in other countries. What the central bank and the Ministry of Finance have done is give the local banks time to improve their competitiveness and opened up the system on a gradual basis.

"On the one hand, increased competition means we have to work harder, on the other hand it also keeps us competitive and forces us to improve and innovate, which is healthy for the entire system, and beneficial to customers.

"The nature of competition has changed [with Asian banks now investing overseas] but in the longer term the global banks will come back. I think to have more presence by banks from other Asian countries is healthy. Chinese companies will move internationally everywhere to promote further trade and investment and will require support from their banks."

Key measures under the capital market development plan: measureable key performance indicators

Key measures under the capital market development plan: measureable key performance indicators

Foreign influx

Ms Kittiya says the trend is towards increasing competition. "It's not only the FSMPII, there are many other drivers of competition. Thailand opened up more to foreign financial institutions after the Asian crisis, allowing them to take over some local banks. There is technological change enabling consumers to compare prices much better, there is disintermediation as well as low interest rates pushing depositors to look for alternative investments."

At The Banker's Finance Thailand 2010 conference held in Bangkok in late February, finance minister Mr Korn said economic growth would reach 5% in the first three months of the year, but that the government remained committed to infrastructure projects contained in the fiscal stimulus programme. At the event he received an award for being The Banker's Finance Minister of the Year 2010.

Governor of the Bank of Thailand, Dr Tarisa Watanagase, said in her opening speech at the conference: "The financial system must serve the needs of the real economy which will become more complex with economic globalisation, an ageing population and increasing demands from corporates and households."

The Thai government appears to have all the right plans for the future - it just needs political peace and a functioning democracy to take it to the next level of development.

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