Thai banks on an overseas buying spree

But this could reduce their capital buffers and create additional risks.

Thai banks are expanding internationally and increasing their risk amidst pressures on profitability, reports Fitch Ratings. This follows a trend towards rising risk appetite amongst banks in Asia.

In December 2019, Bangkok Bank agreed to acquire an 89% state in Indonesia-based PT Bank Permata. Just last month reports emerged that Kasikornbank was in talks to buy a 35% stake in Myanmar's Ayeyarwaddy Farmers Development Bank. In January the Siam Commercial Bank was also revealed to be seeking regulatory approval to upgrade its Myanmar representative office into a bank subsidiary.

Fitch expects other large Thai banks to examine the potential for international expansion, amongst other strategies to support growth. Thai’s bank sector enjoys a reasonable capital position, which could support inorganic growth overseas.

But the scale of possible acquisitions may be limited by capital bases, and few would likely match the scale of the Permata deal, Fitch added.

Further, significant offshore expansion, particularly in lower-rated jurisdiction, could reduce banks' capital buffers and indicate an increase in risk appetite. Expansion into more challenging operating environments may also create additional risks for Thai banks, as well as for other financial institutions in Asia that adopt this approach.

Of the Thai banks, Bangkok Bank has significant international experience having operated in Indonesia for many years. The institution also has subsidiaries in Malaysia and China. Other Thai banks have much more limited international operations. As a result, Thai banks pursuing overseas expansions would likely focus their efforts within Southeast Asia as part of an effort to limit the potential risks associated with operating in unfamiliar environments, the report read.

Low interest rates, subdued credit growth prospects and tough competition in home markets have served to fuel greater appetite for overseas M&A, a trend that will likely continue in 2020, according to Fitch. Banks are also seeking to service the growing international operations of their domestic clients.

“In general, we would view banks from developed economies in Asia as better positioned for overseas expansion in terms of their financial profiles and expertise,” the report read.