Thai banks' resilience will be tested as moratoriums expire: S&P
The government's relief measures have blunted the impact of Covid-19 on Thailand's banks, but financial resilience will be tested in 2021 as loan moratoriums are set to progressively expire, the S&P Global Ratings said on Tuesday.
It expects banks' asset quality to deteriorate in the next 12-24 months and the non-performing loan (NPL) ratio to increase up to 6 per cent of total loans.
"Reported NPLs have remained benign in 2020, averaging 3.3 per cent for the banks we rate, only modestly higher than 2019's systemwide average of 3 per cent. This resilience comes despite a second wave of Covid-19 infections late last year," S&P said.
The proportion of the loan book under moratorium has reduced to an average of about 20 per cent for major rated Thai banks, compared with systemwide average of 31 per cent in the initial phase of the moratorium in mid-2020.
S&P, however, opined that temporary relief measures are unlikely to eliminate risks for weaker and more vulnerable debtors, although they may lessen the strain and delay recognition of problem loans.
The central bank extended debt moratoriums for the more vulnerable retail and small to medium-sized enterprise (SME) borrowers until June 2021.
Credit risk is already heightened in Thailand, given the very high household debt. Another vulnerability is the tough environment for export-oriented SMEs, some of which are getting priced out by more cost-efficient manufacturers in neighbouring Vietnam and Cambodia, S&P said.
The rating agency expects credit losses for the banking sector to remain elevated at 1.9 per cent of outstanding loans this year, from 1.2 per cent in 2019. Credit costs have increased across the board, which has dragged down the return on assets of rated banks to 0.7 per cent in 2020, versus the systemwide average of 1.4 per cent in 2019.
S&P believes proactive provisioning coupled with good capital levels will continue to provide a cushion to downside credit risks. Rated Thai banks have beefed up already high provision coverage ratios to about 155 per cent as of end 2020.
S&P expects banks will continue to build buffers in 2021 to defend against higher delinquencies as loan moratorium and relief measures are phased out. Even though large domestic banks maintained healthy Tier-1 capital adequacy ratios of over 15 per cent, the regulator has instructed banks to limit 2020 dividends to 50 per cent of profits and not to exceed 2019's payout ratio.
S&P is forecasting a U-shaped recovery in 2021 with GDP growth of 5 per cent for Thailand. This revival is needed to stabilise credit conditions. A prolonged delay in the country's economic recovery would deepen the downside scenario for domestic banks, given high household leverage and the weakness in the SME sector, S&P warned.
