Challenges for Thai banking system lie ahead
The Thai banking sector has encountered numerous challenges in the aftermath of the COVID-19 crisis, particularly in dealing with debt issues to aid borrowers facing financial difficulties.
However, as the economy gradually recovers, businesses are adapting and aligning themselves with the returning normalcy.
In the second half of 2023, while the overall Thai banking system remains robust and ready to support the country's economy, it must also remain watchful of economic risks and prepare for various challenges.
The performance and outcomes of the Thai banking system reflect its strength as a mechanism to facilitate business growth.
The banking system showed improvement in the first quarter of this year, with a 21% increase in net profit compared to the same period in 2022. This growth was driven by higher net interest income and expanding loans, albeit not at an accelerated pace, and was particularly notable in the large financial and commercial sector, including residential mortgages and personal loans.
Loan quality showed a slight improvement compared to the end of 2022, but non-performing loans (NPLs) still accounted for 2.7% of the total. This can be put down to proactive debt management and assistance to customers in debt restructuring.
Regarding the stability of the banking system, reserve funds and liquidity levels remained consistently high, capable of meeting the increasing demand for loans projected in the upcoming period.
Loan expansion is anticipated to be slower in 2023 due to the impact of rising interest rates, especially for large businesses and SMEs, which experienced some contraction in the first quarter.
A significant portion of large businesses sought capital through debt securities, while personal loans expanded in line with the economic recovery. While continuous economic expansion driven by factors such as tourism and increased consumer spending has occurred, challenges may arise from the export sector, potentially impacting overall loan expansion.
Furthermore, the commercial banking system faces significant challenges, including high levels of competition for deposit mobilization, which have intensified due to rising interest rates and the gradual reduction in excess reserves resulting from continuous loan expansion. Other factors include a declining trend in loan quality, new regulations pertaining to climate change, and increased competition in the digital realm.
The trend of deposit mobilization in the commercial banking system is expected to accelerate, reaching around 5% by the end of 2023, aligning with the projected economic growth of approximately 3.4%.
The system is preparing its liquidity to support the anticipated loan growth of 1-2% but competition for deposit mobilization poses challenges for financial cost management, particularly for small banks, as the transmission of these costs to increased loan interest rates depends on various factors, including economic conditions and customer readiness.
Loan quality has shown a declining trend following the expiration of debt relief measures. Although the economy has demonstrated consistent signs of recovery, the progress has been unevenly distributed across sectors due to increased production costs and the upward trend in interest rates, potentially affecting borrowers' ability to service their loans.
