Thailand's tumultuous political scene hogged the headlines in 2010 as parts of Bangkok descended into violence during two months of anti-government demonstrations. But the chaos on the streets did not prevent a strong rebound in the Thai economy, led by a sharp upturn in exports and government spending. The economic recovery translated into robust returns for banks and has put the financial sector on a stronger footing for 2011, an election year in Thailand.
The International Monetary Fund estimates that Thailand's fiscal consolidation in 2011 will cut its gross domestic product (GDP) by 1%. The Thai economy remains highly dependent on global demand, as exports of goods and services account for about 65% of GDP. The Bank of Thailand forecasts that overall growth, which may have reached 8% last year, will fall back to between 3% and 5%. As the government scales back stimulus spending, bankers expect increased private consumption to take up the slack as confidence returns.
"The banking sector has remained very resilient despite all the political noise in Bangkok," says Karolyn Seet, a banking analyst at rating agency Moody's. Bank capitalisation has not been compromised by four years of political instability, according to Moody's, which classifies Thailand's banking system as 'stable'.
Key factors
For banks, key factors to watch in 2011 include the pace of tightening after two years of ultra-low rates, the government's fiscal position and the strength of domestic consumer spending. Any slowdown in developed economies may be offset by Thailand's diversification of export markets. Sales to Japan, the US and Europe now account for 30% of total exports, down from 40% in 2005. But bankers and economists warn that China's push to cool its overheating economy could have repercussions across south-east Asia.
"Quite a bit of Thailand and south-east Asia's growth that had slowed down from the US was redirected. So if China thinks inflation is getting out of control, that would be quite worrying because that's the engine that everyone has been redeploying resources to," says Lyn Kok, CEO of Standard Chartered Bank (Thai).
Political risk still hangs over Thailand. The country's prime minister, Abhisit Vejjajiva must call elections by the end of 2011. He took power in late 2008 after the courts dissolved a coalition allied to exiled former prime minister Thaksin Shinawatra. Mr Thaksin remains a force in Thai politics and supported last year's protests. His political party aims to win a majority at this year's election, an outcome that would be unpopular with Thailand's powerful military.
"We've come through two or three political crises in the past few years and bounced back. We bounced because there was external demand and internal demand. But if the external demand is gone, if politically there's a problem, it's going to be a lot harder to bounce back," says Mark Arnold, CEO of Bank of Ayudhya (BAY).
Be prepared
Thai banks appear well cushioned for any slowdown. Average Tier 1 capital ratios of 12.5% are above those of regional peers such as Malaysia and the Philippines, and credit expansion has been modest in recent years, in part because of political risk and weak demand from corporate borrowers. Non-performing loans (NPLs), which spiked after the 1997 Asian financial crisis, have fallen steadily to just over 5%.
But bankers say that there is no sign of a domestic or foreign-led investment cycle that could drive multi-year growth. Indeed, Thailand's large corporate names are increasingly looking to expand overseas, both in developed and emerging markets. Some lenders such as Bangkok Bank are beefing up foreign operations to service these customers. At the same time, Thai banks are redoubling efforts to compete for a share of retail businesses and small and medium-sized enterprises (SME).
"From a retail point of view, consumer confidence is rising and government salaries and minimum wages will also be increased. This means consumer demand is rising and the housing market, hire purchase and personal investment will continue to be strong," says Chartsiri Sophonpanich, president of Bangkok Bank.
As interest rates rise, bankers expect to see increased competition for deposits, which are the principal source of funding for Thai banks. "I think the liquidity side will become an increasing focus for all banks as the rates increase. You're going to see a lot of rates out there. People are going to go longer term or shorter term, depending on their book," says Mr Arnold.
Given the excess liquidity in the system, net interest margins should rise in such an environment, though smaller banks may be squeezed. But bankers must also factor in the loss of fee income from new Bank of Thailand rules to cap interbank transaction fees. The move is part of a regulatory push for greater efficiency in the financial sector. The rules are expected to shave at least 10% off fee income, mostly from large banks that account for the majority of such transfers. Thai banks have doubled their share of fee income since 1997 to about 23% of total revenues, according to Moody's.
Lack of competition?
Yet doubts still remain about the underlying competitiveness of Thai banks. Of the 18 commercial banks in operation, the four largest account for nearly 60% of all assets. Some observers see a market ripe for consolidation, possibly led by foreign shareholders, who have stepped up their involvement in recent years. But there are also powerful interests weighing against any wave of mergers, at least without a strong push from regulators or a major sector-wide crisis.
Prasarn Trairatvorakul, governor of the Bank of Thailand, says qualitative changes in how some banks operate may take precedence over interbank consolidation. Not all banks will be able to afford to invest in sophisticated IT systems and will instead rely on the core banking systems of their competitors. "We observe that some of the mid-sized banks have decided that rather than invest in expensive infrastructure they are renting or utilising the infrastructure of the bigger banks, such as the ATMs," he says.
With the top four banks controlled by Thai families or state agencies, foreign banks have focused on acquisitions in the second tier of lenders. GE Capital has 33% of BAY, the fifth largest bank by asset size in Thailand, which also has a strong retail franchise. In 2007, ING took a 30% stake in struggling Thai Military Bank (TMB). Bank of Nova Scotia owns 49% of Thanachart Bank, which recently bulked up with the takeover of Siam City Bank, which was nationalised after the 1997 crisis and attracted the attention of several foreign banks when Thailand's Ministry of Finance floated the sale.
Smaller lenders have also become acquisition targets. Malaysia's CIMB Group took over Bank Thai, which is now called CIMB Thai. In the first ever Chinese acquisition in Thailand, ICBC took a majority stake in tiny ACL Bank, which has been renamed as ICBC (Thai). These divestments effectively waived the government's long-standing 49% limit on foreign ownership in Thai banks.
Finding a niche
Executives at mid-sized banks are adamant that they can compete with larger banks. In some underserved segments, such as SME lending, opportunities abound for nimble banks with the right products. When it comes to serving the customer, big does not always mean better, say these executives.
"We're not trying to do something similar to large banks and try to tell the customers that we can do better. What we will tell the customers is that we can make a difference, we can create the service that you need and that none of the Thai banks can deliver to you," says Boontuck Wungcharoen, CEO of TMB.
A veteran of Kasikorn Bank who ran its well-regarded SME department, Mr Boontuck joined TMB in July 2008. At the time, NPLs stood at 16%. After write-offs and refinancing, NPLs have fallen to single digits and TMB's loan book has shrunk by more than 20%. TMB has also slashed its staff numbers by 8% to 8600. In 2009, its return on equity was only 4%, compared to an industry average of 14%.
Mr Boontuck says that further restructuring is needed in order to shift TMB from its troubled corporate business and improve its retail and SME mix. "Our competitor is ourself. We will never launch a product that exists in the market unless it's a product that the customers wants," he says.
GE's stewardship of BAY has also seen plenty of churn as it consolidates units handling car loans, insurance and credit cards. As a result, its retail book has risen from 17% of total lending in 2007 to 43% in 2010. Full integration in terms of a unified brand and business culture is the next major goal, says Mr Arnold, who joined BAY in 2009. By creating a single brand 'One Krungsri' across units and platforms, BAY believes it is well placed to compete with larger banks. "We have everything. It's just plugging it in and moving it forward," he says.
All eyes on the US
As the US tries to reinflate its economy, bankers in Thailand are keeping a close eye on the country's capital account. Although inflows spiked in the second half of 2010 in anticipation of a second round of quantitative easing by the US's Federal Reserve, the Bank of Thailand has said that it has no plans to impose capital controls. In 2007, bankers found themselves caught off-guard by similar controls to curb a rising baht. Mr Prasarn says the Bank of Thailand is prepared for any emergency but sees no need to act at the moment.
Standard Chartered's Ms Kok says: "We think the risk is small. There won't be any massive movements [by the Bank of Thailand] because that would send the wrong signal to the market. However, anything can happen if there's suddenly a huge inflow."
Mr Chartsiri of Bangkok Bank agrees that the imposition of capital controls would be a last resort as the Bank of Thailand takes a flexible approach to managing the baht. "The Bank of Thailand has warned Thai businesses to prepare themselves for a stronger baht against the US dollar and it tries to ensure the baht moves in parallel with other Asian economies in order to avoid any serious impact on the macroeconomic environment," he says.
Land of opportunity
The baht rose by 11% against the dollar in 2010, one of the best performing currencies in Asia. For Thai corporations looking overseas, the strong baht represented a buying opportunity. One of the biggest deals in 2010 was the £320m ($500m) sale of a mothballed UK steel mill to Sahavirija Steel Industries, Thailand's largest steel producer. In January, Sahaviriya announced a $200m rights issue to help finance the acquisition.
While the Sahaviriya deal had investment bankers salivating over the fees, it was also a reminder of Thailand's problems in attracting capital into major industrial projects. Ma Ta Phut, the country's premier industrial estate, suffered a major setback in 2009 when dozens of big-ticket projects were suspended by court order over environmental concerns. Most projects have since restarted after the government set up a panel to resolve the dispute.
Mr Boontuck says that the limited number of major borrowers in Thailand poses a challenge to bankers. He admits that TMB was previously overexposed to certain clients in sectors that were highly cyclical. He aims to refinance up to Bt10bn ($326m) in corporate loans in 2011 so as to diversity the bank's exposure.
"I think the concentration in industries or names is the most difficult risk to manage. Thai banks are all facing this issue, because Thai banks are predominantly holding assets in one country so it's very concentrated. So we have to have a very tight discipline of diversifying the portfolio," he says.
Rising stock
In December, the Thai stock market hit a 14-year high, to the delight of retail investors who dominate local trading. Bankers say some of these gains have been ploughed into Bangkok's property market as developers rush to build on land along commuter train lines. Demand for housing loans rose 15% in the third quarter of 2010, according to Thailand's SCB Securities. This marked a slower pace than in the first half of the year, as tax incentives expired in June.
Amid reports of speculation on condominium units, the Bank of Thailand announced in November 2010 that it would introduce a 90% loan-to-value cap on mortgages, starting in January 2011, with a year's reprieve for single houses. Even before this signal to the market, some bankers had begun to tighten credit to property owners as a hedge against any speculative bubble.
"I think the Bank of Thailand did the right thing but I don't think it went far enough. If you look at markets such as China, Singapore and Hong Kong that suffered from real estate bubbles, they've all done the smart thing to put in low loan-to-value ratios or high requirements for equity," says Ms Kok.
