Thai banks’ sector outlook revised to neutral on slow recovery
Fitch Ratings has revised the Thai banking sector outlook to neutral from improving, as the subdued pace of economic recovery is likely to limit earnings upside.
Slowing exports and weak consumer sentiment have hurt Thailand’s economic prospects, with the Thai finance ministry revising its GDP growth forecast last month to 2.4% from 2.8%.
The Thai banking system's operating profit/risk-weighted assets (RWA) ratio rose to 1.9% in 2023 from the pandemic low of 1.2% in 2020, on rising interest rates and reduced credit costs. However, Fitch believes that the earnings recovery has peaked, and there appears to be limited space for further improvement in banks’ net interest margins or provisioning expenses. Low levels of economic activity will also affect loan growth, which Fitch now expects at 3% in 2024, down from our original forecast of 5%.
Fitch sees the banking sector’s impaired-loan ratio rising slightly to 3.5% in 2024, from 3.3% in 2023, due to the lingering effects of pandemic-era debt restructurings. Downside risks to asset quality are, however, mitigated by high levels of reserve coverage – the sector’s loan loss allowance coverage remained healthy at 173% in 1Q24. Thai banks’ core capital levels, with an average common equity Tier 1 ratio of 16.0% in 1Q24, present another buffer against the downside.
These loss absorption buffers contribute to Thai banks’ existing headroom in their standalone credit profiles, as indicated by their Viability Ratings (VRs). Furthermore, the Issuer Default Ratings on Thailand’s six domestic systemically important banks are also supported by their Government Support Ratings or their Shareholder Support Rating, which are equal to or higher than the VRs of these banks. Hence, rating downside would also be dependent on changes in our assessment of extraordinary support prospects.
Over the longer term, an environment of sustained weak growth raises strategic challenges for Thai banks. We expect that Thai banking groups will increasingly seek other business opportunities, such as in non-bank financial institutions, or overseas expansion – with attendant potential effects on their risk profiles. See also our ‘Thai Banks Dashboard: April 2024’ on Thai banks’ foreign exposures.
