Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
WorldJuly 2 2012

After the floods: Thailand plays catch-up

Devastating floods and political instability saw Thailand's economy grind to a halt in late 2011. However, the country's banks have emerged relatively unscathed, and with its economy now growing at a good pace, the country is looking forward to experiencing good times similar to those that its south-east Asian neighbours have enjoyed.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
After the floods: Thailand plays catch-up

A country that has been characterised of late by political tensions and flooding, Thailand is now bouncing back from its troubles and catching up with its Asian peers. As growth in many Asian countries begins to show signs of slowing, banking executives are upbeat about the prospects for the Thai market. 

“It is an exciting time,” says Dr Kobsak Pootrakool, executive vice-president at Bangkok Bank, who is encouraged by many investment projects taking place in the public and private sector. Also, he notes, there is growing interest from foreign investors, who are attracted by Thailand’s sizeable domestic economy, as well as its prime location as a springboard to the countries that make up the Association of South-east Asian Nations. 

Flood devastation

Such optimism is notable because of the manner in which Thailand has bounced back from the severe floods which devastated the country in October 2011, killing more than 800 people. Lyn Kok, president and CEO of Standard Chartered Bank Thailand, emphasises that these were not flash floods. “People were living under water for months – that has taken a toll,” she says. Aside from the physical damage, Thailand's economy was disrupted because people were unable to get to work. 

The floods wiped out the country’s growth for the year – Thailand's gross domestic product (GDP) shrank by 9% in the fourth quarter of 2011 – with the annual GDP for the year ending up at 0.1%. Since then, the International Monetary Fund (IMF) has predicted a V-shaped recovery and projects that the country's economy will grow by 5.5% in 2012, and 7.5% in 2013. “It highlights the resilience of businesses here, both Thai and multinational,” says Matthew Lobner, CEO of HSBC Thailand, of the country’s bounce back from the floods.

During the floods, Mr Lobner says his first priority was to make sure that his staff were safe, and second, to ensure that staff critical to the operations of the bank were put in hotels near their workplace. Mr Lobner, who has a naval background and is trained for such crises, says an attitude of ‘let’s get it done’ prevailed among Thai people, including the bank’s own workforce. From his office window he points out where the water, albeit shallow and non-threatening, briefly flooded some lower-lying areas surrounding Bangkok.

[Thailand’s SME sector] is an untapped market – there are 2.9 million SMEs and only one-third has access to financial services

Somkiat Sirichatchai

On the north side of Bangkok is the headquarters of Siam Commercial Bank (SCB), which had to be partially evacuated. Unlike SCB, access to HSBC’s offices was still possible. In the suburbs, however, the story was different and Mr Lobner explains that a number of staff homes were damaged by water. The bank arranged a programme whereby staff – including Mr Lobner himself – travelled to the affected suburbs to help clean up and renovate employee homes. 

Banking impact

Despite the social impact of the flooding, the effect on the banks was not as bad as many had feared. Apisak Tantivorawong, president of Krungthai Bank, says that it took almost two months for the flooding to recede. “After that, our customers were able to adjust to the situation quite well. Most of them have already recovered and their production business has already gone back to normal. The effect on the banking side has been minimal – it was not as bad as we expected,” he says, adding that while there has been an increase in non-performing loans (NPLs), it has been quite small. 

The Bank of Thailand introduced forbearance for borrowers affected by the floods for six to 12 months, and the impact of this policy will not manifest itself until later in the year. 

According to Thailand's central bank, NPLs for the Thai banking sector in the first quarter of 2012 were Bt270bn ($8.53bn), and the ratio of gross NPLs to total loans actually fell from 2.7% to 2.6%, a reflection of the growth in loans. 

“We are lucky in Thailand as the economy has been good for the past two years so the balance sheet of corporates was very good, and the balance sheet of the banks also helped in everything coming back to life,” says Mr Pootrakool. Deepak Sarup, chief financial officer at SCB, agrees. “The banks are pretty strong and well positioned to absorb the losses that may arise as a result of the severe flooding,” he says. 

The floods also brought with them another blessing in disguise. Mr Pootrakool explains that many factories had old machinery which had to be replaced because of the flood damage. With this has come an increase in productivity. “Things are not that bad now – Thai companies are more efficient,” he says. 

Production levels are also returning to normal. According to the Bank of Thailand, in April 2012 manufacturing production expanded year-on-year by 0.5% after five months of contraction in the aftermath of the floods. Many of the manufacturing plants that were affected were foreign-owned, which meant that Thai banks did not have to absorb their losses, as foreign companies tend not to borrow from local banks, according to Mr Sarup. 

Competition intensifies

Away from the disruption of the floods, competition in Thailand’s domestic banking sector has been heating up. “The competition is very high,” says Mr Tantivorawong at Krungthai Bank. “But that is good for the customers – we would like to have competition.” 

Deposits have been the focus of heated competition, which has been contentious because of the rapid growth of the state-owned Government Savings Bank (GSB). According to a local news report, GSB’s deposits at the end of 2011 were Tb1525bn, a year-on-year increase of 29.27%. Many observers argue that GSB has had an unfair advantage because, unlike commercial banks, it has not had to pay a levy on deposits and so has been able to offer higher interest rates. The government has now increased the levy to 0.47%, which the state-owned players also have to pay, in what is widely viewed as a move to level the playing field. (GSB declined to be interviewed by The Banker for this article.)

This is the first real cycle Thailand has had since 1997… For several years Thailand has been punching below its weight 

Deepak Sarup

While the domestic banking sector has been competitive in deposits, many point to the potential for the financial services industry to develop further in Thailand. Ms Kok at Standard Chartered says that the market capitalisation-to-GDP ratio, as well as the financial sector contribution to GDP, in Thailand is smaller than other south-east Asian markets, such as Malaysia and Singapore. And Somkiat Sirichatchai, senior executive vice-president at Kasikornbank, also points to the loan to GDP ratio, which is still lower than other Asian markets that have the same level of financial infrastructure development. 

A prudent path

Thai banks and businesses have generally been prudent and conservative, a consequence of Thailand being the epicentre of the Asian financial crisis in 1997-98. Since then the banks have transformed themselves. 

“We decided in 2000 we would transform the bank," says Mr Sarup at SCB. "First we completed our recapitalisation, then we started to transform the core franchise – never again would we go to the state [for a bailout].” He adds that the transformation process has been continuous since then, “As we moved, the market moved, and competitors moved. We were fortunate and lucky that we started before the others came and did something similar. Through transforming first, we gained the first-mover advantage, moved ahead of our competitors in profitability and in the process gained market share.” 

At Krungthai Bank, Mr Tantivorawong says that the institution is now in a growing phase. He explains that as a result of the Asian financial crisis, the bank – as a partly state-owned entity – continued to take on new customers in the difficult environment. As the other local banks shed their NPLs, Krungthai took on many of these customers and refinanced them, which resulted in the bank being saddled with a lot of bad debt. Bringing the NPLs down from about 10% seven years ago to 2%, says Mr Tantivorawong, was a “major task”.

Another phase of the bank’s transformation has been to retrain the staff to be more customer-oriented and introduce a sales culture, which focuses on increasing fee-based income. With these goals achieved, the bank has now rebranded and, says Mr Tantivorawong, is ready to take off. Krungthai has grown in recent quarters, and “we believe we can grow even faster this year and next year,” says Mr Tantivorawong.

Kasikornbank has also been undergoing a core banking transformation programme, which should be completed by 2013. Once the project is finished, Kasikornbank hopes that it will be able to offer more products and cross-sell more effectively to its customers. One area for opportunity, says Mr Sirichatchai, is the small and medium-sized enterprise (SME) segment. “It is an untapped market – there are 2.9 million SMEs and only one-third has access to financial services,” he says. Kasikornbank has been targeting this segment, and one of its offerings is a value chain solution whereby SMEs are given credit at a lower cost because the risk assessment is based on the business as part of the whole supply chain.

Foreign activity

The domestic market is dominated by Thai banks, although a number of foreign banks – such as Citibank, Malaysia's CIMB and Singapore's United Overseas Bank – have a presence in the country, while HSBC is withdrawing from the retail market. In January 2012, the UK bank announced that it was selling HSBC Thailand’s retail banking business to Krungsri Group's Bank of Ayudhya. Mr Lobner explains that HSBC’s withdrawal from Thailand’s retail banking sector does not reflect a lack of confidence in the Thai banking market itself, but rather HSBC’s new strategic vision under group chief executive Stuart Gulliver. 

“HSBC has made it clear that we are committed to the corporate banking sector. We have increased the capital allocated to this sector with assets that previously supported our retail operations here. Over a two-year period, we plan to increase our balance sheet in Thailand – just not in the retail space,” says Mr Lobner. 

Standard Chartered – which carries the marketing strapline ‘here for good’ – is positioned as a local bank in Thailand after it acquired a majority stake in Nakornthon Bank in 1999 and later integrated it into Standard Chartered’s Bangkok branch in 2005. 

“We aim to be the best local international bank, and the best international local bank,” says Ms Kok. As a local bank, Ms Kok adds, “the ambition that we have is always local – we are always comparing ourselves to the local banks. We have to recognise that we are never going to be a big indigenous bank so we are competitive in certain niches... We recognise we have to be faster and better and more creative. We are never going to be a giant – we want to be David, not Goliath.” Areas of opportunity, according to Ms Kok, are in the SME sector as well as in wealth management. 

Political problems

Although there are opportunities and potential for the banking sector to grow in Thailand, the industry has been operating against a backdrop of political tension. Many executives point to the successful election and peaceful transition in July 2011 when Yingluck Shinawatra was elected, which followed years of instability and alternating violent protests between yellow shirts – supporters of the People's Alliance for Democracy (PAD) party – and red shirts – a public pressure group which supports the United Front for Democracy Against Dictatorship party.  

Mr Lobner also points to the significance of the country’s change in government, highlighting that the elections and transition of government both went peacefully. “Despite the floods and despite the political instability, business sentiment and investment continues and the banking sector – both retail and corporate – remains strong,” he says. 

Like many banking executives in Thailand, Mr Sirichatchai at Kasikornbank does not mind which party is in power, just as long as there is stability. “We need stability so that policies can be continuously measured and managed,” he says.

Instability threatened to erupt again in June when yellow shirt protestors disrupted a parliament session debating the return of former prime minister Thaksin Shinawatra – Yingluck’s brother – to Thailand. They were members of the PAD, the same group that was opposed to Mr Shinawatra before he was removed from power in a military coup in 2006. 

“Political stability is important for economic development and for the banks,” says Mr Sarup. He argues that under the previous administration the economy was on an upward trend. “The same momentum has been continued – the stock market is reflecting that confidence,” he adds. 

Mr Sarup says that Thailand began a benign cycle at the beginning of 2011. “This is the first real cycle Thailand has had since 1997,” he says, adding that the improving political situation in the country has not caused the recent growth, but rather helped it. “For several years Thailand has been punching below its weight,” he says, and while Asia grew, Thailand’s growth by comparison was sub-optimal. While growth in other markets in Asia is slowing, Thailand continues to benefit from pent-up demand that is coming with the political stability, according to Mr Sarup. “We are catching up with the good times that others have clearly had,” he says. 

Was this article helpful?

Thank you for your feedback!