Euromoney: Thai banks recover with the country

Euromoney, September 2013

Thai banks are growing strongly as the country recovers from devastating floods in 2011, with the sector as a whole posting a 14% year on year increase in second quarter profits, according to Nomura analyst James Moss. Moss, who had actually predicted higher still growth (17%), is negative on the retail segment, “where growth is slowing and NPL formation rising”, and positive on the corporate and SME sector, where lending is accelerating for the first time since the 2011 floods. “Contractor backlogs, foreign investment applications and industrial land sales are all up sharply since 2010,” he says. “Coupled with elevated business confidence which has recovered after the detrimental commodity super-cycle, the implication is that investment is rising.”

The banking system is dominated by four major houses: Bangkok Bank, Kasikornbank, Siam Commercial and Krung Thai. Beyond them other significant institutions are Kiatnakin Bank, TMB Bank, Bank of Ayudhya, Thanachart Cap and Tisco Financial.

Despite the growing profits, some analysts are reining in their enthusiasm. In August Credit Suisse downgraded the Thai banking sector, along with Malaysia’s. “The good thing about Thai banks is that they have kept P&L credit costs relatively close to normalised levels, and are projected to report the best earnings growth in Asia in 2013E,” said the bank in an August report. “But credit-to-GDP ratio has expanded by 20% in the last four years, largely on household debt.” Only a quarter of that debt, unusually, is the mortgage: that is, most debt has been extended to low-income households for consumption. And Deutsche calls for “a selective stance on Thai banks,” favouring TMB Bank, Siam Commercial and Bangkok Bank. Its overall weighting on the sector was dropped to neutral on June 3.

For some time now, Credit Suisse’s analyst has been pointing to falling rural income because of commodity prices fading. That has political consequences too. “This does not bode well for economic growth or asset quality in the banking sector,” the bank says; its top picks are Kasikornbank and Krung Thai, and its least preferred, Siam Commercial and Bank of Ayudhya.

Others are more positive. Elsewhere, Morgan Stanley rates Thailand financial services “attractive” and is expecting 10.5% loan growth in financial 2013; and Macquarie has an overweight call on Thai banks, particularly favouring Kasikornbank “on the back of a solid earnings profile and the most balanced business mix among the Thai banks. KBank’s earnings should remain driven by continued strong performance in non-interest income, cheap funding costs and improvement in the cost ratio,” analyst Passakorn Linmaneechote wrote in August, also upgrading Bankgkok Bank to outperform on the bank of its strong capital and NPL coverage ratio and an increase in SME loans. Nomura, which expects 12% loan growth in the second in fiscal 2013, favours Kasikornbank as its top pick and has buy recommendations on Krung Thai, Bangkok Bank and Siam Commercial.

Euromoney went with Siam Commercial in our awards for excellence, rewarding the largest bank in the country by market capitalization, branches and ATMs for its leadership in several other metrics: highest net profit in the industry in 2012 and the first quarter of 2013, highest return on assets, return on equity (23.7% in the first quarter of 2013, though Kasikorn was higher over 2012), highest loan growth and lowest cost to income ratio.

Several foreign institutions jostle in Thailand, with a number of different areas of strength. Morgan Stanley, our investment banking winner in this year’s awards for excellence, is historically strong across M&A, equity and debt, while others tend to thrive in particular areas. UBS is excellent in M&A, and has the vast PTT conglomerate as a key client. Credit Suisse is a leader in equity capital markets, and HSBC, characteristically, stands out for its presence in domestic debt.

Outside of investment banking, several commercial banks are showing renewed interest in the country. Japan’s Bank of Tokyo-Mitsubishi UFJ has proposed a takeover of Bank of Ayudhya, which would lift the foreign share of total commercial bank assets in Thailand from 18 to 26%. This would be something of a landmark: it would be the largest foreign-owned bank in Thailand, and the first time the 49% limit on foreign ownership was waived for any reason other than saving the bank in question. Standard Chartered, Singapore’s UOB, China’s ICBC, Malaysia’s and Taiwan’s Mega all have subsidiaries in Thailand, while TMB is part owned by ING and DBS, and Thanachart by Scotiabank.