As a tide of red ink engulfs financial institutions in Europe and the US, bankers in Thailand are breathing a cautious sigh of relief.
Having largely missed out on the global asset bubble that ended so calamitously last year, their balance sheets are in good shape, buoyed by ample liquidity from local deposit funding. Most banks had loan-to-deposit ratios in the mid to low 90s in the first quarter of 2009.
A clear danger, however, is the contraction in Thailand's export sector, which accounts for about two-thirds of economic growth. The Asian Development Bank predicts that the trade-dependent Thai economy will shrink this year by 2%, not as acutely as Malaysia and Singapore, but enough to crimp asset growth and require higher credit provisioning.
Mortgage books are also taking a hit as bankers tighten the screws on property loans, among other asset classes. Thailand's banks are still forecasting overall loan growth in single digits. However, many borrowers have already pulled back, worried by the global slump in demand for goods and services, including manufactured products from Asia. As factory lay-offs have risen, the Thai government predicts that unemployment could peak at 1 million out of a workforce of 38 million, dealing a serious blow to consumer spending.
World issue
"It's all about jobs. It's not just a Thailand issue, it is an issue across the world now," says Peter Eliot, managing director of Citibank Thailand.
Another key concern is domestic politics. Former prime minister Thaksin Shinawatra, a popular telecoms tycoon who was deposed by the military in 2006, is still hoping to make a comeback. His supporters brought about the cancellation of an Asean summit in April. The economy suffered a huge loss from the week-long seizure last December by anti-Thaksin protesters of Bangkok's two airports.
Back in 2007, a military-appointed government alarmed investors with capital controls and a hastily drafted business law that was widely seen as unfriendly to foreign investors. Both initiatives were later shelved, but the negative sentiment lingered, as did the sense of political uncertainty.
Protracted turmoil
Analysts say that the protracted turmoil, which dented consumer confidence and prompted companies to put investment plans on ice, did have a silver lining. Banks in Bangkok did not get swept up by a bull market in the way that their counterparts in New York and London did.
"No party, no hangover," says Alastair MacDonald, head of Thai research at Macquarie Securities. "We haven't had a lending binge or any big asset bubble in the stock or housing markets."
Most banks did expand their loan books in 2008 but much of the new credit was channelled into capital expenditure by clients rather than into frothy debt-driven markets. Some borrowers sought to tap existing credit lines last year in anticipation of tighter conditions as the depth of the global crisis became apparent. Demand has since slowed sharply, with Bangkok Bank, the country's largest lender with $48bn in assets, warning of negative growth in the first quarter of 2009.
Bankers say that the painful lessons of the 1997/98 Asian financial crisis, which began with the devaluation of the Thai baht, still resonate strongly in Thailand. This is true for bankers as well as regulators at the Bank of Thailand, who are determined not to be caught out again. Most companies are also well provisioned for a downturn, with low gearing ratios.
"This economic cycle is far different from the past crisis when the whole economy was over-leveraged, causing an economic bubble with no solid fundamentals. Without a major bubble, a major slowdown will possibly cause less pain than before," says Prasarn Trairatvorakul, president of Kasikornbank.
Bank of Thailand data suggests that bankers do have some room to take hits on their balance sheet, if the economy shrinks as expected.
Capital-adequacy ratios average at 14% and only two mid-sized banks are dependent on hybrid Tier 1 capital instruments. Other banks have a strong Tier 1 cushion. Liquidity is generally strong, although some smaller banks are reliant on wholesale funding markets that have become harder to access.
Credit quality
Thai banks have taken early action on credit quality, with a rise in provisioning in the final quarter of 2008 as the shockwaves from Lehman Brothers' bankruptcy rippled outwards. Fox-Pitt Kelton, a global specialist in financial institutions group banking solutions, calculates that Thailand's largest five banks raised their average provision expenses to 104 basis points of loans in the fourth quarter. This compares with 73 basis points in the first nine months of 2008.
Tan Kong Khoon, president and CEO of Bank of Ayudhya, which is part-owned by GE Capital, shares the cautious optimism of his peers, arguing that there is no sense of panic about the economic slowdown. He anticipates loan growth in certain sectors of the economy, including medical tourism and food processing industries that play to Thailand's strengths.
"Having gone through hard times, banks see this (downturn) as another cycle. Yes, it will be a strong recession. But we're all mentally prepared," says Mr Tan.
As well as cushioning against asset deterioration, Thai banks have written down a swath of non-performing loans (NPLs), including legacy non-performing loans left over from the 1997 meltdown. The Bank of Thailand has been pushing banks to clear up these loans. As a result, average NPL levels in the sector have fallen to 5.6%, down from 11.9% in 2004.
The biggest write-down was at Bangkok Bank, which shed 28.2bn baht ($800m) in NPLs in the second half of 2008, including a sale of problem loans to third parties. None of the banks have said that they would need to raise additional capital to cover these write-downs, a fact that analysts say points to strong fundamentals already in place.
Export earnings
Fitch Ratings is sanguine, however. It perceives risks from the rapid slide in Thailand's export earnings will have the knock-on effects on the rest of the economy. It predicts that the Thai economy could contract by up to 4% if external demand does not recover. Credit costs are bound to rise, as small and medium-sized enterprises (SMEs) that have borrowed to expand are being tested by the global crisis.
"The biggest concern is a slow burn on asset quality. If the economy contracts by 4%, it is not good for the banking system. At some point, this will show up in the numbers," says Vincent Milton, managing director of Fitch in Thailand.
Kannikar Chalitaporn, president of Siam Commercial Bank (SCB), says that her team is closely monitoring loan deterioration. Last year, SCB created a special unit that uses early warning indicators and consultations with customers to pre-empt problem loans. It also tightened its mortgage lending, in which it is a market leader in Thailand.
However, despite the warning signs, Ms Kannikar remains fairly upbeat on SCB's loan growth in 2009, with a target of between 5% and 7% across all segments. She perceives that the best potential is among Thai corporate borrowers, for whom the bank's growth target is set at 13%."We believe these targets are achievable as we continue to identify and pursue business opportunities despite tough economic times. For example, we plan to pursue opportunities with blue-chip corporations and state enterprises that are now seeking domestic financing due to unfavorable global financial markets," she says.
Standard Chartered, which operates as a local bank in Thailand after a 1999 acquisition, experienced first-quarter growth both in deposits and in lending in its upper-tier consumer niche. CEO Mark Devadason, who is on his second posting in Thailand, expects this trend to continue.
"There is activity going on, if you've got the right bank and right products. We're cautiously optimistic about ability to win market share," he says.
Analysts warn that Thai banks which expanded aggressively into SME lending in recent years may run into trouble. Some deterioration was already apparent towards the end of 2009, with an uptick in NPLs. To many market watchers, Kasikornbank is a litmus test for the resilience of SME lending because it has built a substantial book in this segment.
Scoring system
Kasikorn's Mr Prasarn says the bank's experience and a sophisticated scoring system allows loan officers to gauge the credit risk in lending to smaller companies. Careful execution is key to a successful SME programme, particularly during tough economic times.
"In contrast with concentration risk in the corporate loan portfolio, SME risks are largely diversified and therefore more manageable should asset problems arise. Once risks are correctly read, the appropriate interest rate is charged, making the SME segment one of the more profitable segments," he says.
Foreign banks compete aggressively in some market segments in Thailand but to a lesser extent than in liberalised markets such as Indonesia. A barrier to retail expansion is a freeze on opening branches. Citibank has used its kiosks to expand its $5.5bn loan book.
As the biggest foreign credit card issuer in Thailand, Citibank was quick to tighten up last year in line with global conditions. "We got ahead of it, so the NPLs on our credit cards and personal loans are much better than the market average," says Mr Eliot.
A flurry of acquisitions in recent years brought new foreign owners into Thailand's banking sector. Malaysia's CIMB has been busy recapitalising BankThai and honing a new management team. However, the global pullback of banks such as ING, which owns 30% of Thai Military Bank, and GE Capital has raised questions about their presence in the market.
One deal that appears unaffected is Bank of Nova Scotia's purchase of Thanachart, a specialist in car financing. In February, the Canadian bank doubled its stake to 49% in a deal that valued Thanachart at 1.6 times its book value.
Thai newspapers have reported that Scotiabank may also buy into state-owned Siam City Bank. This interest is taken by observers as a vote of confidence in Thailand's financial underpinnings.
"The fact that the [Thanachart] transaction is going ahead at previously agreed pricing suggests that Nova Scotia doesn't see any catastrophic risk in the bank or in the banking sector," says Mr MacDonald.
Thai banks' NPL lag effect versus GDP
