Thai household debt growth threatens bank asset quality: Fitch

Household debt-to-GDP soared to 82.3%.

Rising household debt in Thailand is a threat for banks' asset quality, particularly if economic conditions worsen, says Fitch Ratings. The higher household leverage, as well as expectations of an economic downturn (Fitch forecasts growth of 2.5% in 2014), underpin Fitch's negative outlook for the sector.

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However, we believe that banks remain reasonably positioned to weather the challenges of a more difficult operating environment, as long as the downturn is not prolonged or more severe than expected.
Thailand's household debt-to-GDP rose to 82.3% at end-2013, from 77.3% at end-2012, according to data published by the central bank on 31 March. The pace of growth has slowed, with household debt rising by only 11.4% in 2013. 

We expect the pace to slow further in 2014, because of the expiration of a car buyers' tax break, slower economic growth and a more cautious lending environment. The car tax incentive programme expired at end-2012, but deliveries and related lending continued well into 2013.

Asset quality at state policy banks would be more vulnerable in weaker economic conditions because they lend to lower-income households as part of their goal to improve financial access. State policy banks funded 29.5% of household loans at end-2013. But any deterioration in credit profiles would not directly affect their support-driven ratings, which are linked to the sovereign credit profile.

We believe commercial banks can manage their household debt exposures because these have not reached excessive levels. They hold only 42.5% of total household debt; and their loan portfolios are fairly balanced, with only 30% in consumer loans. Commercial banks have also built up capital and loan-reserve buffers, giving some protection against more challenging conditions.

Nevertheless, there are signs that asset quality has already weakened. The non-performing loan ratio for consumer debt rose to 2.2% at end-2013, up from 1.9% a year ago, while "special mention" loans for consumer debt rose by 70bp, to 3.5%, over the same period. Continued credit growth could also stretch the sector's loan-to-deposit ratio, which is already high at 97%.

Vulnerabilities are also accumulating in less-regulated entities outside the commercial banking sector. Non-bank financial institutions and savings co-operatives provided 28% of household credit in 2013.

Systemic risks would rise if household debt growth does not slow down. These risks could become an increasing source of asset-quality problems - particularly if a worse-than-expected slowdown amidst Thailand's political turmoil results in sharp rises in unemployment and inflation. 

This increases the contingent liability risk the sovereign could face if support for the banking sector is required in the event a large economic shock undermines capacity for households to service debt.