This article first appeared in The Edge Malaysia Weekly on October 24, 2022 - October 30, 2022

THE economic risks for Thailand’s banking sector remain high, say analysts, noting that lenders in the country have been relatively slow to recover from the impact of Covid-19 compared with their regional peers.

This turns the spotlight on CIMB Group Holdings Bhd’s 94.83%-owned Thai subsidiary, CIMB Thai Bank PCL, which, along with other banks there, reported their third-quarter earnings last week. Over the last four years, CIMB Group derived anywhere between 5% and 11% of its profit before tax from Thailand. It is its third-largest overseas market after Indonesia and Singapore.

According to S&P Global Ratings, banks operating in Thailand remain exposed to high economic risks, citing inflation, a rising interest rate environment, a depreciating baht and high household and corporate leverage.

Nevertheless, there are early signs of an economic recovery and, with that, the profitability of Thai banks is slowly on the mend; however, credit costs are likely to remain elevated over this year and the next, says Ivan Tan, a director of financial institution ratings.

“Pre-Covid-19, Thai banks were usually capable of generating ROA (return on average assets) of 1.2% to 1.4%, but that has significantly reduced in 2020 and 2021 because of the very high credit cost and the ultra-low interest rate environment, which put downward pressure on the banks’ net interest margin (NIM),” Tan says in a webinar last Wednesday.

“We think they are on track to achieving 1% ROA this year, and we conservatively forecast ROA of 1% next year as well, the key reason being that the sector hasn’t fully recovered from Covid-19 at this point. There are still huge Covid-19 restructured loans that we think may require further provisioning down the road.”

He believes credit costs for the banking sector peaked around 1.5% in 2020.

“Credit costs have trended down, but as the relief measures for some of the weaker borrowers start to expire, and some of the loans under restructuring tend to run down and transition potentially to NPLs (non-performing loans), we think banks will maintain an elevated level of credit cost for this year and next year. Based on our conversations with the banks, given the macroeconomic headwinds from inflation and also rising interest rates, there might be a tendency for them to put some management overlays,” he says.

The banking sector’s NPL ratio has been flat at around 3.1% in the last three years, mainly because of the relief and loan restructuring measures for borrowers.

Tan notes that the level of restructured loans stood at about 31% of total loans at the height of the Covid-19 pandemic in 2020, but this has since come down significantly to an estimated 10% currently. However, this is still higher than that of regional peers (see table).

“The restructuring scheme is still ongoing but will start to expire as we approach the end of 2023. While the majority of these restructured loans will be able to repay, there will be some proportion that will end up defaulting. So, we forecast an increase of NPL to 3.9% next year,” he says.

S&P is projecting economic growth of 2.9% this year and 3.5% in 2023, following last year’s 1.5% growth. It sees the Bank of Thailand, which has raised the policy rate by 50 basis points so far this year to 1%, hiking the rate further to 1.5% by year-end, and potentially 3.25% next year, in a bid to combat inflation.

Last Friday, CIMB Thai, the country’s eighth-largest lender by assets, reported a net profit of THB695.97 million (RM86.4 million) for the quarter ended Sept 30 (3QFY2022), which represented a decline of 7.6% year on year and 34% quarter on quarter. The y-o-y decline was attributed to lower net interest income, coupled with higher operating expenses, income tax expenses and a slight increase in expected credit losses (ECL).

For the cumulative nine months, its net profit grew 64.6% to THB2.81 billion as ECL fell by 45.5%. Its NIM over earning assets fell to 2.7% compared with 3.1% a year earlier.

The gross NPL ratio improved to 3.4% from 3.7% as at end-2021, mainly because it sold some NPLs this year as part of efficient risk management policies. Gross loans grew 5.8% year to date.

CIMB Thai’s financial results were “nothing to shout about but nevertheless in line with expectations”, a local banking analyst tells The Edge. “Provisions are unlikely to shoot up any higher … as the bank has already made [sizeable] provisions in the last two years.” Meanwhile, Bangkok Bank Plc, the largest lender, reported third-quarter net profit of THB7.7 billion, up 11% y-o-y and 10% q-o-q. Provisions rose 18.4% q-o-q to THB9.9 billion.

“The results are below our expectations [but in line with consensus’], owing to higher-than-expected provision expenses. Aside from the high credit cost, the bank’s performance improved in all aspects,” says UOB Kay Hian Research in an Oct 21 report.

Meanwhile, TMBThanachart Bank Plc, the sixth-largest lender, reported third-quarter net profit of THB3.7 billion, up 58% y-o-y and 8% q-o-q, which was above UOBKH’s and consensus’ expectations. The better results were mainly due to lower provision expenses. 

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