Siam Comm new

When Thailand’s banks were hit with a ratings downgrade, it created uncertainty across the sector. With the country reopening to tourists and the banks exploring new growth models, there is hope of a return to form. Peter Janssen reports. 

The Bank of Thailand (BOT) recently issued a statement emphasising the financial stability of the domestic banking industry despite two years of Covid-19 induced pain — such were the shockwaves of the March decision by S&P Global Ratings to downgrade four of the country’s six biggest banks.

The downgrades themselves were hardly shocking. Fitch Ratings had issued similar bank downgrades in 2020, at the beginning of the pandemic, citing similar reasons: mounting bad debt and a low-profit, low-growth environment. These were not just Covid-related problems, but rather the result of deeper structural issues in Thailand: an ageing society, high household debt and declining competitiveness in a fast-growing, dynamic region.

However, the Covid pandemic has indeed added to Thailand’s structural challenges, as has the Russia–Ukraine war, which already sparked inflation of nearly 5% in an economy that has enjoyed a decade of flat inflation in the 1–2% range.

This new challenge of high inflation could further complicate the banks’ massive task of cleaning up their Covid-related bad debt. S&P estimated that more than half of the accrued debt benefitting from BOT relief measures (or 14% of total credits) will require “deep restructuring”, with 5% turning into non-performing loans (NPLs) within the next two years.

The NPL picture should become clearer in mid-2023 when the central bank’s extended forbearance measures are wound up. “We believe the banks will remain stuck with the restructured loans for long time, which will lead to a permanent loss of margins,” said S&P.

While the banks are facing a long period of low profitability, nobody is currently predicting another financial crisis, as was witnessed in 1997 when the collapse of the Thai baht sparked the Asian financial crisis that decimated much of south-east Asia’s financial landscape. Since then, the banks and most large Thai corporations have shied away from dollar borrowing, turning to the Thai bond market and stock exchange instead, leaving the system far less exposed to external blows. The BOT has also tightened up its regulations on the banks.

After two years of Covid-19, Thai banks’ capital adequacy ratio is at 20%, one of the highest in Asia, and provisioning for bad loans is six times higher than their announced NPLs.

High liquidity, low growth prospects

“Of course [bad debt] will impact the banks’ profitability, but it will not create a weaker balance sheet,” says Payong Srivanich, chairman of the Thai Bankers’ Association and CEO of Krungthai Bank. “We are well over-reserved and well capitalised, so we may sacrifice some profitability along the way, but at the end of the day the stability is there and a quick recovery can be anticipated,” he says.

Thailand is expecting 2.5–3.2% growth in gross domestic product this year, which might be revised upwards if tourist arrivals reach 10 million, thanks to a relaxation of Covid-19 travel restrictions. Both domestic and foreign investment appears to be on an uptick. “The banks are extremely strong because their capital is extraordinarily high, meaning that banks are very much ready to support Thai businesses to get back on their feet again,” says Piti Tantakasem, CEO of the recently merged TMB/Thanachart Bank (TTB).

Other than a quick tourism revival, it is difficult to see where Thailand’s future growth will come from. “This is the strategic challenge that every bank faces,” says Parson Singha, senior director of financial institutions at Fitch Ratings (Thailand). “It’s just very dependent on the operating environment; and if the operating environment is one of low economic growth, then that inherently reduces opportunities for traditional banks.

Of course [bad debt] will impact the banks’ profitability, but it will not create a weaker balance sheet

Payong Srivanich

The high competition at the top of Thailand’s banking scene does not help. After the merger of TTB in 2021, Thailand now has six banks classified by the central bank as ‘domestically systematically important banks’ — essentially banks that are ‘too big to fail’. Besides TTB, there are Bangkok Bank (BBL), Siam Commercial Bank (SCB), Kasikornbank (KBank), Krungthai Bank (KTB), and Bank of Ayudhya (Krungsri).

S&P in March downgraded SCB, KBank, KTB and TTB to BBB/stable. However, it kept BBL and Krungsri at BBB+. Fitch Ratings has KTB and Krungsri at BBB+, and BBL, SCB, KBank and TTB at BBB, all with a stable outlook.

Looking for the growth

There are two basic growth strategies that the six big banks are pursuing: expand their operations abroad and digitalisation. All six have invested heavily in the digitalisation of their services over the past six years, with the process hastened by the Covid-19 lockdowns and social distancing. As the banks have collectively waived transaction fees on cyber banking since 2018, the digitalisation transformation has thus far been most effective in terms of cutting costs, especially in terms of bricks and mortar.

Thailand’s nationwide bank branch network has fallen from 7065 in 2016 to 5553 at year-end 2021 — a 21% drop — according to BOT figures. With each branch costing an annual estimated Bt10m ($294,000) in operating expenses, this mass closure represents a lot of savings. And with fewer branches to operate, most of the banks have also been cutting staff — a process made easier by Thailand's rapidly ageing population facilitating early retirements.

Some banks are starting to see digital returns on the revenue side. KBank’s cyber banking application ‘K PLUS’, which claims 17 million users with the largest market share in Thailand, has successfully leveraged the service into increasing its loan portfolio. “We introduced digital access to lending products and services to increase credit accessibility for digital users, which altogether increased loan applications to KBank by as much as six times,” says KBank CEO Kattiya Indaravijaya.

Going abroad

Most of the big Thai banks have regional ambitions, but only BBL and Krungsri have thus far succeeded in making clear inroads abroad. BBL, which has the largest deposit base among the Thai banks, and whose strengths are corporate banking and trade finance, has had an overseas bank network for decades.

It clinched its position as Thailand’s leading international bank and the sixth-largest bank in the Association of Southeast Asian Nations (Asean) region, with the $2.3bn purchase of the mid-sized PT Bank Permata in May 2020. After completing the integration last year with BBL’s Indonesian operations, it became the 10th-largest bank in Indonesia. In 2021, Bank Permata increased its net profit by 70.6% year-on-year, grew its total assets by 18.5%, deposits by 23.5%, and trade volume shot up 60%.

“Bank Permata also successfully executed its first cross-border trade finance transaction between Indonesia and Thailand using blockchain technology,” says Chartsiri Sophonpanich, CEO of BBL. The acquisition and integration of Permata has allowed BBL to meet its target of placing 25% of its loans overseas.

“Our international loan portfolio now stands at 25% of the total,” Mr Sophonpanich says. “Permata, as a diversified, leading, mid-sized bank in Indonesia, is an outstanding addition to our international network that enables us to better support our investors in Indonesia, while diversifying our revenue streams and giving us higher exposure to high-growth markets.”

Krungsri, which was acquired by Japan’s giant MUFG in 2013, is pushing into the Asean’s consumer finance market. It launched its overseas expansion with the opening of Krungsri Leasing Services in Laos in 2014, followed by a Krungsri representative office in Myanmar in 2015. It then purchased the microfinance lender Hattha Kaksekar in 2016, which was upgraded to a commercial bank (Hattha Bank) in 2020. During the same year, Krungsri acquired a 50% stake in SB Finance Company of the Philippines, and in 2021 bought the entirety of SHB Finance, a consumer finance company, in Vietnam.

The bank is close to reaching its target of earning 10% of its total income from overseas operations by 2023. “In 2020 we had only 2–3% of our income for overseas, but last year, our net income from abroad increased to 6%. That was a huge jump,” says Pairote Cheunkrut, chief strategy officer of Krungsri. “The biggest contributor for us was Cambodia, because they have done well after we upgraded them to a commercial bank,” he adds.

In Thailand, Krungsri’s main strength is in consumer finance — an expertise it is now exporting to the Asean market. “Krungsri not only offered a growth opportunity for MUFG in Thailand, but also provides an Asean platform for expansion,” says Mr Pairote. In 2019, MUFG boosted its share in Bank Danamon Indonesia from 40% to 94%, giving it a solid foothold in the fast-growing Indonesian retail banking segment.

Non-traditional banking growth models

KBank and SCB are not without their own overseas expansion plans. However, they have been more focused on diversifying their activities into non-traditional banking activities, such as digital assets, fintechs and start-ups.

In September 2021, SCB announced a radical restructuring  to prepare for a more complex financial future. The bank is in the process of setting up a holding company (to be called SCB X), that will own SCB and other subsidiaries, such as Card X, providing overseas credit cards and personal loans; Auto X, lending for motorcycles and cars; Alpha X, leasing loans for super cars and big bikes; and Robinhood, a food delivery service SCB launched during the Covid-19 lockdowns.

Unfortunately for the bank, SCB X took a bit of a blow from regulators in March when the BOT announced a cap on bank investments in digital assets at less than 3% of their total capital. The ruling will have an impact on SCB’s plans to buy a 51% stake in Bitkub Online, a local cryptocurrency exchange.

The jury is still out on whether such digital investments will prove profitable for SCB. “It can be a double-edged sword for SCB, to the extent that if they don’t do well, if there is mismanagement or a loss, or they require funding or dividend cutbacks from SCB to fund loss-making subsidiaries, then that could have a downward rating action for SCB,” says Ivan Tan, financial institutions analysts at S&P Global Securities.

“Conversely, if the non-traditional businesses do extremely well, and push up the overall profitability of the group, then that could have a rating upside for SCB,” he told a recent webinar.

KBank, whose strengths include retail banking and small and medium-sized enterprise (SME) lending, has likewise plunged into the digital industry and services, chiefly by using its subsidiaries such as Kasikorn Business Technology Group (KTBG), a digital innovation centre and investor in new start-ups and fintechs; and Kasikorn Line, a joint venture with Thailand’s most popular freeware app.

Earlier this year, Thailand’s Securities and Exchange Commission granted the first initial coin offering to Kubix, another KBank subsidiary, making it the first such portal in the country. “With the venture we can better serve our corporate and SME customers by providing an alternative channel for businesses to raise funds and expand their investment opportunities for retail investors,” says Ms Indaravijaya.

KBank hopes to leverage these digital services into a pathway for expansion into Asean and China, where it has set a goal of having 10 million users and contributing 5% of total net income by 2024. “We have begun by offering mobile banking and online lending services to individuals and small businesses in China, Vietnam and Cambodia,” says Ms Indaravijaya. “In this regard, we are leveraging our proprietary digital financial service solutions that we have developed over the years.”

Steady as they go

While SCB and KBank have thrown their eggs in the digital basket, TTB and KTB are sticking closer to traditional banking, albeit with a digital take on it.

After seemingly successfully merging TMB and Thanachart, TTB is concentrating on keeping its 10 million customers happy. “We want to see an organisation that can [give] Thai people better wellbeing,” Mr Piti says. The bank has launched four products aimed at improving customers financial wellbeing and stability through closer banker/customer advice and guidance. “Because of Covid, people listen more because they have been hit hard, big or small. People are starting to behave differently.”

Meanwhile, KTB, which is 55% owned by the BOT, has also benefited somewhat from Covid-19. The Thai government used KTB to funnel many of its relief programmes to the population during the pandemic, winning the bank some new customers in the process as they were encouraged to join the KTB online applications to facilitate payments.

But this would not have been possible had KTB not invested heavily in its digital platform, which had been partly designed to capture state employees and entities. “The government is our regulator, it is our main client [KTB is the government’s chief cash manager] and they are our main shareholder. That is why we work closely with them and support their needs,” says Mr Payong.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter