Even before the Covid-19 pandemic hit Thailand, the country’s banking system was facing bleak growth prospects. The economy suffers from serious competitiveness constraints, including a swiftly ageing society, comparatively high labour costs in a low-cost region, a limited pool of skilled workers and high-tech engineers, and a strong baht currency (pegged on its sound fiscal fundamentals, such as steadfast current account surpluses).
Then came Covid, prompting lockdowns from April to May 2020, and bans on international flights — decimating the once robust tourism sector that represents nearly 18% of gross domestic product (GDP). The Bank of Thailand (BoT) predicts an 8.1% GDP contraction this year, at least, and predicts things will not return to pre-Covid levels until 2023 at the earliest.
Given the Covid-19 crisis and its severe impact on the private sector, Thai banks are in for a long spell of low profits and high non-performing loans, expected to hit 6% of all loans by year-end 2020 compared with just 3.4% in 2019, according to S&P Global Ratings’ estimate. While credit rating agencies have downgraded some of the bigger banks’ ratings, there are not serious concerns about the stability of the system.
“Thai banks are still in very sound shape in terms of capital and in terms of liquidity,” says Parson Singha, senior director of financial institutions at Fitch Ratings (Thailand). “The two big buffers are core capital — this is equity which for the system’s average is around 15.7% — [and] the second buffer is in terms of loan-loss reserve coverage, which for the system average is 136%,” he says.
Bank mergers
Before the pandemic, Thailand’s banking hierarchy was shaken by two mighty mergers and acquisitions destined to alter the landscape. TMB and Thanachart, two mid-sized banks, agreed to merge in September 2019, and had finalised the deal by year-end. TMB paid THB130bn ($4.14bn) for a stake in Thanachart Bank, which has now become a subsidiary. The new bank, to be named TMB-Thanachart, will officially become one entity by the second quarter 2021 when it returns one of its banking licenses to the Bank of Thailand.
The second game-changing deal of 2019 was Bangkok Bank Public Company Ltd’s (BBL’s) acquisition of PT Bank Permata — Indonesia’s 12th largest bank by assets. After winning the bid in August 2019 to buy a 89% stake in the bank from its two previous shareholders — PT Astra International (45%) and Standard Chartered Bank (45%) — BBL finalised the transaction on May 20th, 2020 with a $2.3bn payment. The deal clinched BBL’s position as Thailand’s leading international bank and as a leading bank in the south-east Asian region.
BBL is no stranger to the international market. The bank’s founding father, Chin Sophonpanich, set up its first overseas branch in Hong Kong in 1954, followed by branches in Tokyo (1955), Singapore (1957), London (1957) Kuala Lumpur (1959), Ho Chi Minh City (1961) and Jakarta (1968). Before the 1997 Asian financial crisis, BBL was consistently ranked as the largest commercial bank in the Association of South-east Asian Nations (Asean). Although hard hit by the 1997 crisis, BBL has retained its overseas network with 31 branches in 14 different economies, distinguishing itself from the other Thai banks. “Bangkok Bank is pretty much the only Thai bank with a lot of international experience,” Mr Singha says.
Thai banks are in for a long spell of low profits and high non-performing loans, expected to hit 6% of all loans by year-end 2020
In terms of strategy, BBL president Chartsiri Sophonpanich insists the Permata deal does not presage a slew of similar bank acquisitions. “The Permata (purchase) is one of a kind,” Mr Sophonpanich says. “We did not go out and look for an acquisition. The opportunity came up and we saw a good fit.”
Buying Permata means investing in Indonesia’s future growth, which is more promising than Thailand’s. “Indonesia is the largest economy in Asean, twice the size of Thailand, and it has good long-term growth potential,” Mr Sophonpanich continues. Permata is a medium-sized bank, about 10% the size of BBL, with 312 branches in 62 Indonesian cities and 3.75 million existing customers. With the Permata acquisition, the ratio of BBL’s international to total loans will jump from 17% to 25%.
BBL is likely to benefit from the professional banking operations and standards already put in place at Permata Bank by its previous shareholder, Standard Chartered. These include an advanced digital banking platform, including its pioneering PermataMobile X application. “They have a good presence [among] start-ups and fintechs, so we can learn from the process,” Mr Sophonpanich says.
Later this year, BBL will fold its existing branches in Jakarta, Surabaya and Medan into Permata’s domestic network. This will open the door for BBL to expand into retail banking in Indonesia, while better serving its Thai corporate clients in the country — a major target of Thai foreign direct investment in recent years. “Permata has a full banking service so that enhances our capacity to serve BBL customers,” Mr Sophonpanich notes.
Taking up vacancies
The TMB/Thanachart merger was likewise the result of an opportunity created by a departing foreign bank, in their case Canada’s Scotiabank. Unlike BBL’s purchase of Permata, TMB was actively looking for a partner. “I knew it was difficult for a mid-sized bank to make an impact; so, when I became CEO of this bank about two years ago, my idea was to merge with another mid-sized bank,” says Piti Tantakasem, CEO of TMB Bank.
“Less than a year ago, when I approached Thanachart and their shareholders, I knew that [Scotiabank] had changed their strategy; they would like to go back to focus on the American continent and withdraw from Asia,” Mr Tantakasem says. Scotiabank previously held a 49% stake in Thanachart, the lion’s share of which was sold to TM Bank, paving the way for the merger. ING, a major shareholder in TMB, has kept its shares, although diluted, in the merged bank.
Piti Tantakasem, CEO, TMB Bank
The merger of TMB/Thanachart has altered Thailand’s banking landscape, which was previously comprised of five big banks, two medium-sized banks and a dozen smaller banks. Now there are just six big banks and a dozen small ones. “The six big banks combined eat up [about] 90% of the market share because, after the merger, we represent around 10% of the market share,” Mr Tantakasem says. TMB/Thanachart’s combined assets amount to nearly TBH2bn, ranking it as Thailand’s sixth largest bank after the Bank of Ayudhaya. It has a combined branch network of 900 branches nationwide (to be reduced to about 700), 19,000 employees and more than 10 million customers.
TMB and Thanachart are deemed a good match on several counts. Firstly, while TMB Bank is strong on the deposits side, Thanachart is strong on lending, especially in auto hire purchase lending, in which it is a market leader. TMB has a strong digital platform and was a pioneer in launching a smartphone banking application in the local market. Both banks have benefitted professionally from their strong strategic investors — ING in TMB and Scotiabank in Thanachart.
With its consolidated books, TMB was the only Thai bank to report a leap in profits this year (net profit up 108% in the first half of 2020), but that will change next year with the year-on-year comparisons. To distinguish itself from the other big banks, TMB has set a course of introducing innovative products, such as providing stock investment advice, pension plans and health insurance coverage in lieu of small interest rates on deposits and, of course, digital banking. “We needed to create a fee engine, and our fee engine is mainly in the fields of investment and protection — bank insurance and mutual funds — because we see that Thailand is moving to a middle-income economy and more towards an ageing society,” Mr Tantakasem says.
Digital banking
Thailand’s biggest banks — BBL, Kasikorn Bank and Siam Commercial Bank — have all been investing heavily in digitalisation over the past three to four years, in an effort to stay competitive, improve efficiency and offer new products. The process has been hastened by the Covid-19 pandemic. Internet and mobile phone transactions accounted for almost 70% of all payment transactions processed through payment systems during the first five months of 2020, compared with 60% for all of 2019 and only 25% in 2016, according to BoT data.
During Covid-19 lockdown months, when work from home measures were enforced, digital banking skyrocketed and new products were pushed through. “For example, because of the crisis, we took some shortcuts and launched robotic process automation overnight, to help with disbursements and registration of new customers,” says Pipit Aneaknithi, president of Kasikorn Bank. Kasikorn could accelerate the launch of the new process largely because it has invested heavily in its digital infrastructure over the past five years, including the establishment of Kasikorn Business Technology Group (KBTG) four years ago, with an annual budget of THB5bn to devise new digital innovations and services.
During Covid-19 lockdown months, when work from home measures were enforced, digital banking skyrocketed and new products were pushed through
The massive investment in IT is deemed worthwhile for Kasikorn to stay competitive and prepare against disruption from start-ups and fintechs. “In Thailand, there has been very little successful disruption in the financial sector, because the banking sector has been fast enough to adapt,” says Mr Aneaknithi. Kasikorn, through KBTG and its wholly owned Beacon Venture Capital, has been actively buying up or investing in new start-ups and fintechs.
For example, Kasikorn recently invested $50m in the Grab online food delivery service, providing an e-wallet and offering mini-loans to the 10,000 or so motorcycle delivery people. Online food ordering and delivery was one of the services that took off during the Covid-19 lockdown. When Thailand eventually opens its borders again to international tourism, KBTG will be ready for the influx of new Chinese tourists (who accounted for 11 million out of 40 million international arrivals in 2019).
“We have developed our KBTG Eatable QR ordering service,” said KBTG’s chairman Ruangroj Poonpol. “We can place this mini-app inside WeChat so when Chinese tourists come here and go to a restaurant, they will see a digital menu in Chinese and the restaurant does not have a problem with incorrect orders,” says Mr Poonpol, formerly Google head of marketing, Asia-Pacific.
Pipit Aneaknithi, president, Kasikorn Bank
Kasikorn Bank is planning to expand its overseas network, not through acquisitions of foreign banks, but via partnerships with smaller-sized local banks and by leveraging its Thailand-based digital banking infrastructure. “We are not going to expand regionally using the same business model as BBL, because it is too costly,” Mr Aneaknithi says. “We will get our licenses, get an outlet in the country and then we will expand digitally.”
Last year, international revenues accounted for only 1% of Kasikorn’s total revenues and 90% of that was generated in China. “Our goal is to be a digital bank, so we will facilitate trade from China to Asean Economic Community (AEC), and from AEC to China. That will be our core strength,” Mr Poonpol adds. “Secondly, we will be targeting Chinese tourists coming to Thailand.”
Besides its China operations, Kasikorn recently acquired a 35% stake in Myanmar's A Bank and a 40% stake in PT Maspion Bank in Indonesia. Both banks are quite small, but Kasikorn hopes that its strong digital infrastructure will help them grow in their home markets. “We can play the role of disruptors in the neighbouring countries,” Mr Aneaknithi says. “We think we need to help our partners upgrade their business in the local market environment. We are going to standardise the technology platform and then we will customise it according to the customer’s preference.”
Whether BBL or Kasikorn’s overseas ventures succeed remains to be seen, but one thing is for certain — there is not much growth for the banks in the foreseeable future in Thailand. “Given the low growth prospects in Thailand, the Thai banks have had to search for new avenues of growth,” Fitch’s Mr Singha says. “One obvious area is overseas, where there are much faster growing markets, and the other is digitalisation — attempting to improve efficiency and somehow capture all the New Age opportunities.”
