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Asia-PacificMay 1 2006

Unbridled by uncertainty

Thailand’s banks are riding out the political uncertainty left by the departure of prime minister Thaksin Shinawatra. Simon Montlake reports from Bangkok.
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It was billed as Thailand’s deal of the century: Singapore’s Temasek Holdings’ $1.9bn takeover of a 49.6% stake in telecoms group Shin Corp. But the January 23 sale turned into a political disaster for outgoing Thai prime minister Thaksin Shinawatra, whose family received a tax-free windfall from the deal. On April 4, after months of street protests and a disputed election, Mr Thaksin agreed to step down after five years as premier.

It is too early to write off Mr Thaksin, a self-made billionaire who steered the Thai economy through its recovery from the 1997-98 Asian financial crisis. But his departure is likely to fuel a lengthy round of political jockeying and constitutional tinkering that relegates economic policymaking, and particularly large-scale public investment, to the backburner. The new government, due to be formed this month, is expected to defer big economic decisions before holding national elections by next year.

Political worries

“The next government will be an interim one, so how much can they accomplish? Their mandate is to revise the constitution. That, to me, is a concern,” says Vichit Surapongchai, chairman of the executive committee of Siam Commercial Bank (SCB). Together with Bangkok Bank, SCB provided Bt23bn ($605m) in onshore financing for Temasek’s acquisition of the Shinawatra family shares.

Ironically, Mr Thaksin claimed at the time of the takeover that his children, who were major shareholders in Shin Corp, had wanted their father to concentrate on politics.

Bankers hoping to repeat last year’s expansion when net loans grew 8.7% to Bt4652bn will be disappointed. Analysts say a more likely scenario for 2006 is credit growth in the range of 6%, provided companies do not scrap investment plans in response to the political instability. A tightening trend in monetary policy is also giving borrowers pause for thought, as the Bank of Thailand has signaled its determination to choke off inflation over the next 12 months. Gross domestic product (GDP) growth slowed last year to 4.5%, down from 6.1% in 2004, and economists have predicted a similar performance in 2006.

Welcome step

Until Mr Thaksin ran into trouble, the banking sector was looking forward to a fresh round of corporate investment as well as increased foreign trade and investment. But stalled free-trade talks with the US, which included negotiations on easing entry barriers on US financial service companies, were suspended as a result of the political wrangling. That may be a welcome step to bankers, who are wary of opening the door too rapidly, even if the price is temporary government policy drift. They can also rely on healthy net margins and increasing fee income.

“It was looking as though most companies were running high levels of capacity. What was missing was confidence [to expand], and this is a short-term setback,” says Andrew Maule, regional banking analyst at ABN AMRO. “Loan growth may disappoint but margins remain high.”

Bankers say there are plenty of reasons to be optimistic, despite the recent turmoil. One reason is that Thai markets held up well under the pressure: the Stock Exchange of Thailand (SET) recorded a 5% rise in the first quarter, and foreign-exchange inflows from the Shin Corp takeover helped to bolster the Thai baht. Healthy foreign reserves and strict inflation targeting gave investors reason to trust the Bank of Thailand’s assurances of monetary stability and strong fundamentals. Similarly, a state of emergency in the Philippines in February did not prompt a capital outflow or stock sell-off.

Blow to investment

The removal of Mr Thaksin is a blow to the government’s ambitious infrastructure plans, which included investment in railways, roads, water plants and other long-term projects. Foreign companies had been invited to bid under public-private financing schemes that were designed to cap public debt and deepen domestic capital markets. For commercial lenders, there were ripe pickings from the projects, with forecast capital expenditure this year of Bt290bn. Now those projections are being set aside.

“The government engine has stopped. The only engine that’s humming is exports, while rising interest rates are hurting consumer confidence,” says Kitti Nathisuwan, head of research at Macquarie Securities. “Company investment plans could be held back, given the uncertainty in politics.”

Some sectors are holding up, though. Japanese car manufacturers have continued to expand their production facilities along Thailand’s eastern seaboard, known as the ‘Detroit of the East’. Supavud Saichuea, managing director of Phatra Securities, says that Thai corporations are also poised for expansion, given their strong balance sheets.

The hold-up in public spending will have a knock-on effect, however. “A lot of the private sector investment is to augment government investment, so we have a complementary delay. This is still a robust economy, and everyone is pencilling in a degree of investment by the private sector,” says Mr Supavud.

Investors may have to wait for new listings on the SET. Approval has been granted for nearly 30 SET equity offerings in 2006 but only two have listed since January, and hopes of government privatisations have been dashed by the cancellation of a planned initial public offering for power utility Electricity Generating Authority of Thailand.

Potential deal

Perhaps the most talked about deal, at least among bankers, concerns the Bank of Ayudhya, which reportedly held talks with credit-card partner GE Consumer Finance on a potential equity acquisition. No deal has been announced and some market-watchers are sceptical that GE can make it work because it already operates a finance unit in Thailand that it would have to abandon or merge. If the deal does pan out, though, it would add to competition among the 15 domestic banks operating in Thailand.

Smoother operations

Banks have made efforts in recent years to improve their consumer banking operations after decades of corporate-led growth. For some lenders, this has paid off, with rising income from mortgages, credit cards and other products that were not given much attention previously. Thai consumers now have far more branches, ATMs and online options to choose from. For bankers, the question is how to leverage these improved services to expand loan books and generate more fee income.

“Branch expansion is a double-edged sword. Some of our competitors are reluctant to match us. It’s all cost, if you don’t bring in revenue. A lot depends on your strategy – do you have a consumer retail strategy or not?” asks Mr Vichit.

SCB has concentrated on adding outlets in shopping malls to take its branch network to more than 700, compared with less than 500 three years ago. Other banks have adopted different strategies, with some seeking to rebrand and upgrade existing facilities rather than expand too fast. But, with government policy on hold, lending to consumers and family businesses may be the best game for now.

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