Thai banks grapple with slowing exports and weak consumer sentiment

Fitch has revised its loan growth estimates to 3% from 5% previously.

Factors that could raise Thai banks’ earnings remain limited, according to Fitch Ratings.

Lenders in the country are facing a double whammy of slowing exports and weak consumer sentiment, both of which have hurt Thailand’s economic prospects. As a result, Fitch has revised down its outlook for Thai banks from “improving” to “neutral.”

The Thai finance ministry has revised down its GDP growth forecast to 2.4% for 2024, from 2.8% previously.

Over the longer term, an environment of sustained weak growth raises strategic challenges for Thai banks, Fitch warned.

“We expect that Thai banking groups will increasingly seek other business opportunities, such as in non-bank financial institutions, or in overseas expansion – with attendant potential effects on their risk profiles,” the ratings agency said.

Thailand’s banking system’s operating profit/ risk-weighted assets (RWA) ratio rose to 1% in 2023, from the pandemic low of 1.2% in 202, on the back of 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%. In an earlier report, S&P Global Ratings warned that some borrowers may default despite government efforts, which in turn will weigh on banks.

The sector’s impaired-loan ratio could also rise slightly to 3.5% in 2024 from 3.3% in 2023 on the back of 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 Q1 2024,” Fitch noted, adding that Thai banks’ core capital levels, with average common equity Tier 1 ratio at 16% during the quarter, present another buffer against downside.