Thailand's weak loan problem is starting to bite, with rated banks making greater allowances for anticipated losses. This reflects high debt among households, structural weakness in small businesses, and an uneven recovery. Provisions for expected credit losses (ECL) for stage two loans now average 30%, which is much higher than regional peers'. We expect asset of quality to remain strained, with elevated credit cost, but rated banks' high provision coverage and high capital adequacy ratios will cushion the impact on their ratings.
What's Happening
In Thailand, weak loans--comprising stage two and stage three loans--have been inching up. As of June 30, 2024, stage two loans had risen to 6.5% and stage three loans to 2.8%. This compares to 5.9% and 2.7% respectively, as of Dec. 31, 2023. Relief measures expired in December 2023. Consequently, we are seeing delinquencies among vulnerable groups, stemming from high household leverage, a struggling small and midsize enterprise (SME) sector, and a slow and uneven recovery.
Meanwhile, banks have been maintaining healthy provision coverage ratios. As of June 30, 2024, the coverage ratio for nonperforming loans (NPL) for the system stood at 172% (calculated as total allowance as a percentage of stage three loans). While this is down from 177% as of June 30, 2023, it still remains one of the highest ratios in the region.
Thailand's top six banks are maintaining a higher ECL allowance for their stage two loans compared with other ASEAN countries such as Malaysia, Singapore, and the Philippines (see chart 1). Thailand's allowance is similar that of Indonesian banks (see Background In Brief section for more details).
Chart 1
For AmBank the data is as of March 31, 2024. Sources: Company financials. BPI—Bank of Philippines Islands. SCB--Siam Commercial Bank Public Co. Ltd. BAY--Bank of Ayudhya Public Co. Ltd. KTB--Krung Thai Bank Public Co. Ltd. Kbank--KASIKORNBANK PCL. TTB--TMB Thanachart PCL. BBL--Bangkok Bank Public Co. Ltd. OCBC--Oversea-Chinese Banking Corp. Ltd. Rakyat--PT. Bank Rakyat Indonesia (Persero) Tbk. BNI--Bank Negara Indonesia (Persero) Tbk. PT. CIMB--CIMB Bank Berhad. RHB--RHB Bank Berhad. Maybank--Malayan Banking Bhd. Ambank (M)--AmBank (M) Bhd. DBS--The Development Bank of Singapore Limited.
Why It Matters
Asset quality to remain strained, with rising NPLs and elevated credit costs. Forbearance ended in Dec. 2023. We expect the stage two loans to be a better lead indicator of stress in the system. The proportion of stage two loans in Thailand remains high at about 6.5%, reflecting high credit risk in the system. We expect 15%-20% of these loans will require additional support and, in the absence of support, could slip into NPLs over next 24 months. This proportion is higher than our expectation in other countries.
A potential offset is banks' prudent approach to fortifying their defenses. Banks have been maintaining healthy provision coverage ratios and capital adequacy ratios. In our view, Thai banks require a higher proportion of stage two ECL coverage than their regional peers. We expect banks to draw on these provisions over the next few years as the system unwinds the imbalances.
What Comes Next
Our base case projects an orderly unwinding of imbalances. Average credit costs for banks should remain elevated at 1.5% for the next two years at least. We measure this by credit costs of the top six banks, which form 80% of the industry. Banks have aggressively managed bad loans by selling them off or writing them down. This approach combined with stabilizing economic trends will help prevent a post-forbearance jump in NPL ratios, which may inch up to 3.5% of total loans by 2025. We believe the Thai banks we rate can absorb the blow from deteriorating asset quality, leading to stable ratings on most of the banks we rate.
Background In Brief
For Thailand's top six banks, ECL provisions for stage two loans average 30%. Indonesian banks have the same average. This compares with 3%-10% for banks in Malaysia, Singapore, and the Philippines. This stems partly from management's cautious approach in allocating funds to create additional reserves. It also reflects, in our view, the increased risk of delinquencies and loss given default (LGD) in stage two loans in Thailand, particularly considering the uneven economic recovery following the COVID-19 pandemic.
Importantly, most Thai banks have also progressively increased their stage two ECL coverage. Thai banks migrated to International Financial Reporting Standards (IFRS) equivalent accounting standards in 2020, and their initial provisions in the first quarter of 2020 averaged 20%, which they have progressively brought up to the current 30%.
Related Research
- Thailand's Sluggish Economy Is Weighing Down Banks, Feb. 8, 2024
This report does not constitute a rating action.
| Primary Credit Analysts: | Deepali V Seth Chhabria, Mumbai + 912233424186; deepali.seth@spglobal.com |
| Geeta Chugh, Mumbai + 912233421910; geeta.chugh@spglobal.com | |
| Ivan Tan, Singapore + 65 6239 6335; ivan.tan@spglobal.com | |
| Ruchika Malhotra, Singapore + 65 6239 6362; ruchika.malhotra@spglobal.com |
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