What you need to know about Asia Pacific banks flocking into Thailand

Thai Military Bank is currently an acquisition target.

Fitch Ratings says Thailand's banking industry is seeing a growing presence of foreign banks, particularly those from Asia Pacific, with the most recent being Bank of Tokyo-Mitsubishi UFJ, Ltd.'s (BTMU) interest to buy 75% of Bank of Ayudhya Plc. (BAY, BBB/Watch Positive).

Here's more from Fitch:

If successful, the acquisition would increase foreign banks' share of total commercial bank assets in Thailand to 26% from 18%. It would also result in BAY being the largest foreign-owned bank or the fifth-largest commercial bank in Thailand.

It would also be the first time that the 49% foreign ownership limit is waived for an acquisition that is not related to financial rehabilitation of the acquired bank or to the liquidation of bank shares owned by the government.

BAY is a profitable bank and the share purchase will be from private shareholders. Fitch believes this lenient attitude may be because that Japan has been the largest foreign direct investor in Thailand, contributing 30%-40% of total foreign direct investment in Thailand each year during 2001-2012.

The Bank of Thailand (BoT) has recently announced that it will issue up to five foreign commercial bank subsidiary licenses, which allow up to 20 branches and 20 ATMs. This will provide a wider scope for activity than that allowed under a foreign bank branch license but short of a full banking license. Fitch expects that potential applicants are likely to be Asian banks which are new entrants to Thailand. In 2011 the BoT allowed an upgrade of existing foreign bank branches to foreign bank subsidiaries (up to 20 branches and ATMs). However, since then, no foreign branches have been upgraded.

Another Thai bank which is currently an acquisition target is Thai Military Bank (TMB), Thailand's seventh-largest bank, as major shareholders, ING Bank N.V. (30%) and the Ministry of Finance (26%) look to sell their stakes. Asian banks are reportedly expressing an interest. Acquisition from both shareholders would result in TMB becoming another foreign-owned bank, with at least more than 50% owned by foreign institutions.

Almost all foreign-owned banks in Thailand are owned by Asian banks, in keeping with their regional expansion strategies and the growth opportunities that will be brought by the ASEAN Economic Community in 2015. BTMU's proposed acquisition of BAY is part of its business expansion in Greater Mekong sub-region (GMS), comprising six countries including Thailand, with a combined population of 323 million, and 1.2% of world GDP (2011).

Fitch does not believe the entry of BTMU as the fifth-largest bank will affect the leading position of Thailand's four largest banks in the short-to-medium term. BAY is currently the leader in retail lending, particularly in auto hire purchase, and credit cards. Its wholesale segment may benefit from BTMU's relationships with Japanese borrowers, but lending to Japanese clients is not a large part of Thai bank's loan portfolio.

Fitch also believes that BTMU and other foreign-owned banks could be more competitive than Thai banks in intra-regional businesses, where leading Thai banks have yet to establish a meaningful presence. Bangkok Bank Pcl. (BBB+/Stable) has more regional networks than other major Thai peers, with a long-time presence in 11 countries across Asia.

Other large Thai banks' regional expansion strategies are gradual and selective, mainly to support trade and investment flows of Thai clients, and focus on GMS or China. The long-term growth opportunity from increasing regional economic cooperation and integration may ultimately prompt leading Thai banks to focus more on regional expansion or to seek strategic partners.

There are 15 commercial banks in Thailand. Four of them are foreign-owned banks with the foreign ownership limit waived above 49% when they acquired Thai banks. They are Standard Chartered Bank (Thai) (A-/Stable), United Overseas Bank (Thai) (A-/Stable), CIMB Thai (BBB/Stable), and Industrial and Commercial Bank of China (Thai) (AAA(tha)/Stable). There are also currently 15 foreign bank branches, and one foreign bank under a foreign bank subsidiary license.