Thai banking sector's net interest margin to to narrow slightly in the next months

Will net interest income be hurt?

It has been noted that Thailand's economy will continue to face headwinds.

According to a research note from BMI Research, domestic demand remains weak under current military rule, with private consumption and investment contracting by 1.8% y-o-y and 1.3%, respectively, in May.

Meanwhile, Thailand's export performance will continue to be undermined by cooling regional trade prospects. In a sign of waning external demand, exports (which accounted for 75.0% of nominal GDP in 2014) fell by 5.0% y-o-y in May.

From the production side, the heavyweight manufacturing sector contracted by 7.6% y-o-y in May, and such mediocre performance is likely to persist given regional economic weakness.

The pick-up in loan growth is therefore likely to be slow and modest over the coming months.

Here's more from BMI Research:

According to the latest data from the Bank of Thailand (BoT), loans grew by just 4.5% y-o-y in May.

As a result, we maintain our forecast for the Thai central bank to cut its benchmark interest rate by another 25 basis points (bps) in 2015, taking rates to 1.2 5% by year-end, in a bid to provide further support for the economy.

The banking sector's net interest margin will therefore remain under pressure, and we expect it to narrow slightly over the coming months, weighing on net interest income.

We therefore believe banks which have the capability to grow the "fees and commissions" category of their business will outperform over the coming quarters.