-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
1/39
B NK OF TH IL NDThai Commercial Banks One Decade after the Crisis:
Assessment of Risk to Financial Stability
Don Nakornthab
July 2007
DP/03/2007
(English Version)
DISCUSSION P PER
E-Mail Address: [email protected]
By
The opinions expressed in this discussion paper are those of the author(s)
and should not be attributed to the Bank of Thailand.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
2/39
Thai Commercial Banks One Decade after the Crisis:
Assessment of Risk to Financial Stability
Don Nakornthab*
July 2007
1. Introduction
The Thai commercial banking sector was at a center stage of the financial
crisis that hit the Thai economy in July 1997. Beyond inconsistent macroeconomic
policies, aggressive lending by commercial banks was a major factor that fueled the
economic bubble and massive currency mismatch in the real sector. With the collapse
of the exchange rate peg, defaults skyrocketed and banks balance sheets were subject
to severe distress. When the banking sector was on a verge of bankruptcy, what had
started as seemingly containable exchange rate depreciation quickly became a full-
blown twin crisis.
A decade after Thailands worst economic calamity, Thai commercial banks
have seen significant improvements in profitability, asset quality, and risk
management. This paper however is not about how the public and the private sectors
have together helped put the troubled sector back on track. Thailands experience
with banking-sector restructuring and subsequent structural reforms has been well
documented. See, for example, Santiprabhob (2003) and Vichyanond (2007).
This paper is more like an input for central banks macro-prudential analysis.
Its main objective is to assess Thai commercial banks current financial conditions
and short-term outlook which may impact financial systems stability.
The analysis in this paper draws on a number of sources. The main source of
aggregate bank data is the Bank of Thailands website. The sources of individual
bank data are a large database maintained by the Stock Exchange of Thailand (the
SETSMART database) and banks 2006 annual reports. All Thai commercial banks
except one are listed companies and therefore required to disclose to the public a
wealth of financial information.
*Senior Researcher, Economic Research Department, Bank of Thailand. The views expressed in this paper are my
own and not necessary those of the Bank of Thailand. Paper presented at ADB-TDRI-MOF, Thailand JointConference, Integrating Asian Economies: Ten Yeas after the Crisis, Bangkok, 18 July, 2007. I thank ThanawatPruksananont for able research assistant. All errors are the mine.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
3/39
2
The rest of the paper is organized as follows. Section 2 takes stock of the state
of the Thai commercial banking sector as at the end of 2006. Significant content of
the section is devoted to analysis of post-crisis changes and their implications for Thai
commercial banks going forward. Section 3 presents an assessment of Thai banks
short-term outlook, with a focus on their credit risk exposure. Section 4 concludes.
Implications for regional integration are described in Appendix A.
2. The landscape at the end of 2006
This section provides a high-level overview of Thailands commercial banking
sector landscape, dividing into the players and the environment in which they operate.
Where relevant, attempts are made to compare the current landscape to the one right
before the 1997 crisis to highlight important changes that have taken place over the
past ten years.
2.1 The players
a. Industry structure
Figure 1 shows the breakdown of total assets of Thailands commercial
banking sector at the end of June 1997 and December 2006, respectively. In several
aspects, the structure of the industry does not appear to have changed much. There
are about the same number of both Thai and foreign commercial banks today as there
were ten years ago (14 versus 15 and 18 versus 19, respectively). The six largest
banks are the same ones (two have changed their English names). The number one
foreign bank was similarly about the same size as the smallest of the medium-sized
Thai banks. Taken as a whole, foreign commercial banks accounted for about 13% of
the sectors total assets at the end of 2006, dropping slightly from around 15% as ofthe end of June 1997.
Using gross loans and deposits (data not shown) in place of total assets, the
corresponding shares of foreign banks at the end of 2006 were much smaller at 8.3%
and 10.1%, respectively.1 Making up the differences with the total asset share is the
disproportionate shares of foreign banks in interbank and money market items (on
1It is noteworthy that foreign banks share of gross loans has not changed much from June 1997. In contrast, thedeposit share of foreign banks has tripled over the period.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
4/39
3
both the assets and the liabilities sides of the balance sheet), investments in securities
(on the assets side) and borrowings (on the liabilities side). This partly reflects legal
restrictions on foreign commercial banks and hence their different business models
Within the group of Thai commercial banks, the industry has become slightly
more concentrated, with the Herfindahl index increasing from 0.118 to 0.123 and the
combined asset shares of the six largest banks increasing from 74.7% to 80.5%. This
reflects post-crisis industry consolidation and a quest for scale economies by the large
players. In the latter regards, it is noteworthy that large foreign players have also
become larger relative to their foreign peers. The top five foreign banks now control
75% (two-thirds of which belong to Japanese banks) of foreign banks total assets, up
from 42% a decade ago.
Figure 1.Total assets of commercial banks and finance companies in Thailand
1,646
4056
83
87
134
954
46
71
72
129
138
162
203
255
275
350
432
564
704
729
1,216
91 finance companies
Bank of AmericaHSBC
Citibank
Sakura Bank
Bank of Tokyo
All 19 foreign banks
Laem Thong Bank
First Bangkok City Bank
Nakornthon Bank
Thai Danu Bank
Bank of As ia
Bangkok Bank of Comm erce
Bangkok Metropolitan Bank
Siam City Bank
Union Bank
Thai Military BanK (TMB)
Bank of Ayudhya
Siam Commercial Bank
Thai Farmer Bank (Kasikorn)
Krungthai Bank
Bangkok Bank
40
81118
140
178
181
233
1,139
40
80
81
186
189
219
257
412
665
751
942
989
1,206
1,496
2 retail banks
6 finance companiesHSBC
Mizuho
Sumitomo Mitsui
Citibank
Bank of Tokyo Mits ubishi
All 18 foreign banks
ACL Bank
Kiatnakin Bank
Tisco Bank
Standard Chartered (Thai)
UOB (Thai)
Bank Thai
Thanachart Bank
Siam City Bank
Bank of Ayudhya
TMB Bank
Siam Commercial Bank
Kasikorn Bank
Krungthai Bank
Bangkok Bank 17.3%
13.9%
11.4%
10.9%
8.7%
7.7%
4.8%
3.0%
2.5%
2.2%
2.2%
0.9%
0.5%
0.5%
13.2%
2.7%
2.1%
2.1%
1.6%
1.4%
19.3%
11.6%
11.2%
9.0%
6.9%
5.6%
4.4%
4.0%
3.2%
2.6%
2.2%
2.0%
1.1%
1.1%
0.7%
15.1%
2.1%
1.4%
1.3%
0.9%0.6%
Total assets
(Bt m)
Share of banking
sectors assets
Total assets
(Bt m)
Share of banking
sectors assetsJun 1997 Dec 2006
Source: C.B. 1.1 and C.B. 1.2 reports for bank data; BOT website for finance company data
The bottom of Figure 1 shows the number and the total assets of finance
companies at the end of the two respective periods. Finance companies were an
important fixture of the Thai financial sector and had many overlapping businesses
with commercial banks. The distinguishing feature is that these companies were not
allowed to raise fund in the form of deposits, but only in the form of higher-interest-
rate promissory notes. In return, they were given exclusive rights to operate leasing
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
5/39
4
and hire purchase businesses on top of almost everything that commercial banks could
do.2 In 2004, the Bank of Thailand decided to phase out these companies, requiring
them to return their license or upgrade to retail banks which can serve only
individuals and SMEs or to commercial banks which now can operate leasing and hire
purchase business as well (more detail in Section 2.2c).
What is remarkable from Figure 1 is the dramatic decline in the number and
the total assets of finance companies after the crisis. Right before Thailand was hit by
its worst post-war economic fallout, there had been ninety-one finance companies
whose combined assets exceeded one-fourth of the banking sectors total assets. By
the end of 2006, there were six of these companies left, with combined assets of less
than one percent of that of the banking sector. Thus, to the extent that thesecompanies competed with commercial banks in several market segments, the playing
field has now become much less crowded.3
One important change that is masked by Figure 1 is the change in
shareholding structures of Thai commercial banks. Although not as badly hit by the
crisis as finance companies, the banking sector did suffer significant damage. From
1998 to 2000, Thai commercial banks were forced to raise around 800,000 million
baht in additional capital, a substantial sum considering that the combined capital baseof all Thai commercial banks at the end of June 1996 was slightly below 500,000
million baht (about 20 billion USD at the pre-crisis exchange rate). Several banks
were closed down, intervened, sold, or merged into other entities. Of todays fourteen
Thai commercial banks, only nine banks remain Thai privately-owned, compared to
fourteen out of fifteen before the crisis. Three are majority-owned by Financial
Institutions Development Fund (FIDF): Krungthai, Bank Thai, and Siam City. Two
are wholly-owned by foreigners: UOB (Thai) and Standard Chartered (Thai). Buteven among the remaining Thai private banks, foreign ownership has also increased
significantly. Most notably, Singapore-based DBS and U.S.-based GE Capital have a
sizable stake in TMB Bank (18%) and Bank of Ayudhya (29%), respectively. Table 1
shows percent foreign ownership in the nine private banks at the end of 2006.
2A notable exception is foreign exchange business.3It is interesting to note that five commercial banks in operation today (Thanachart Bank, Bank Thai, Tisco Bank,Kiatnakin Bank, and ACL Bank) are reincarnation or upgrades of finance companies.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
6/39
5
Table 1.Foreign ownership of Thai private banks as of December 29, 2006.
Foreign ownership (%)
Bangkok Bank 48.8%
Kasikorn Bank 49.0%
Siam Commercial Bank 34.7%
TMB Bank 37.9%
Bank of Ayudhya 48.6%
Thanachart Bank 0.0%
Tisco Bank 49.0%
Kiatnakin Bank 44.0%
ACL Bank 20.0%Note: (1) Foreign ownership calculated as percent foreign limit less percent foreign availability.
(2) Pre-crisis foreign limit was 25.0%.Source: SETSMART
Finally, it should be noted that while the total assets of the Thai banking sector
grew 37% over the period (41% counting only Thai banks), the ratio of the banking
sectors total assets to GDP declined from 133% to 111%. The fall in banking-sector
assets relative to GDP indicates the reduced significance of the banking sector in the
Thai economy.
b. Thai banks performance in 2006
On many accounts, 2006 was a solid year for Thai commercial banks as a
group. Improved profitability and solvency both contributed to further strengtheningof the sectors financial position.
A look at Thai banks net profit in 2006 alone distorts the picture. All together,
Thai commercial banks 2006 net profit dropped 40% from 2005, bringing down the
sectors return on assets to 0.75, the lowest level in three years. The drop in Thai
banks net profit was largely a result of IAS39-compliant loan loss provision burden.
(See Section 2.2c for more detail of IAS39.) The other major factor that contributed
to the reduced net profit was the expiration of crisis-related tax shield for some
commercial banks. In terms of pre-provision operating profit (PPP) margin, however,
2006 was a post-crisis record-breaking year. The growth in PPP was supported by a
strong increase in net interest and dividend income, which in turn benefited from
improvement in net interest margin (NIM) and continued loan growth.
Figure 2 traces out the evolution of Thai commercial banks net profit and the
amount of loan loss provisioning expenses along with ROA and the ratio of PPP to
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
7/39
6
averaged total assets from 1990 to 2006.4 For our purpose, we use 1992-1996 as the
pre-crisis base for performance comparison. 1992 was the first year that commercial
bank interest rates in Thailand were fully liberalized. It was also the year that
commercial banks were allowed to set up Bangkok International Banking Facility
(BIBF) operation which enabled them to channel low-cost foreign funds to domestic
borrowers and started the subsequent lending boom. There, we see vividly the extent
of the 1997 crisis and the turnaround that followed. Provisions for massive loan
losses turned an industry that had previously registered on average higher than 50,000
million baht of net profit a year into an industry with net profit losses of more than
300,000 million baht in 1998 and 1999. It took nearly five years from the beginning
of the crisis to put the industry back on a stable growth path. Note that if we were to
plot also retained earnings of Thai commercial banks in Figure 2, we would find that
it only turned positive in 2004.
Figure 2. Provisioning expenses, net profit, ROA, and PPP of commercial banks
registered in Thailand, 1990-2006
-400000
-300000
-200000
-100000
0
100000
200000
300000
400000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Million baht Percent
ROA (RHS)
Loan loss provisionsNet profit
PPP (RHS)ROA (RHS)
Loan loss provisionsNet profit
PPP (RHS)
Avg. PPP (92-96) = 2.76% 2006 PPP
= 1.98%
Source: BOT website; Krungthai Bank (1997); authors calculation
While Thai banks 2006 PPP in baht amount exceeded the pre-crisis high,
expressed as a percent of averaged total assets, it was still below the pre-crisis
average. This is due partly to the fact that the cost-to-income ratio of Thai
commercial banks after the crisis has become higher and partly to the fact that most
4To be precise, the data shown in Figure 2 to Figure 6 are for commercial banks registered in Thailand which from
2005 include retail banks and subsidiary of foreign banks in addition to Thai commercial banks. However,because of their small sizes, their inclusion makes virtually no difference with respect to the aggregate financialratios.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
8/39
7
Thai commercial banks still carry a sizable amount of non-income generating assets
(non-performing loans plus foreclosed properties) on their balance sheets.
Figure 3 plots the aggregate NIM and the aggregate cost-to-income ratio of
Thai commercial banks during the same time span as Figure 2. At 3.2%, Thai banks
2006 NIM was a post-crisis high. For the second consecutive year, the increase in
NIM in 2006 was propelled by a stronger increase in interest income relative to
interest expenses. This stood in sharp contrast with previous years where the
primarily culprit for NIM improvement was a relative decline in interest expenses.
Looking in a context of a contemporaneous interest rate cycle, this is consistent with
the observation that during an interest rate downtrend, banks adjust the deposit rates
first, but during an interest uptrend, banks adjust the lending rates first.
Figure 3. NIM and cost-to-income ratio of commercial banks registered in Thailand,
1990-2006
0.5%0.6%
1.0%
1.7%
2.1%
3.0%
3.2%
2.5%
1.8%
182%174%
96%85%
53%57%54%59%66%
0.0%
1.0%
2.0%
3.0%
4.0%
1990 1992 1994 1996 1998 2000 2002 2004 2006
0%
40%
80%
120%
160%
200%
Net interest income/averaged total assets Cost-to-income ratio (RHS)
Average 92-96 = 3.7%
Average 92-96 = 42% 0.5%
0.6%
1.0%
1.7%
2.1%
3.0%
3.2%
2.5%
1.8%
182%174%
96%85%
53%57%54%59%66%
0.0%
1.0%
2.0%
3.0%
4.0%
1990 1992 1994 1996 1998 2000 2002 2004 2006
0%
40%
80%
120%
160%
200%
Net interest income/averaged total assets Cost-to-income ratio (RHS)
Average 92-96 = 3.7%
Average 92-96 = 42%
Source: BOT website; Krungthai Bank (1997); authors calculation
It should be noted that while the 2006 NIM is materially lower than the pre-
crisis average, it is highly respectable by international standards, particularly when
compared to those in developed economies. For example, the average NIM of large
EU banks in 2006 was a little over one percent (ECB, 2006). Pro-market activists
may argue that the high NIM reflects a low degree of competition among Thai banks.
Under the same interpretation, however, the fact that the NIM is below the pre-crisis
average suggests that there is more competition now than before.
One negative development in 2006 was a deterioration of Thai banks cost-to-
income ratio. For the first time since 1998, Thai banks cost-to-income ratio increase
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
9/39
8
over the previous year, propelled by a rise in operating expenses over operating
income. The upturn suggests that the cost-to-income ratio may never go back to its
pre-crisis level, i.e., there may have been a structural shift in the cost structure of Thai
commercial banks. Nevertheless, the 2006 cost-to-income ratio was in line with
international norm and hence not yet a cause for concern.
In terms of asset quality, the ratio of non-performing loans (NPLs) to total
loans of Thai commercial banks dropped further to 8.0%, the lowest level since 1997
(Figure 4). The continued improvement in the NPL ratio reflected banks effort to
clean up their loan books in response to the Bank of Thailand (BOT)s more stringent
provisioning rules that took effect in August 2004 as well as to meet the BOT target to
bring down the ratio of net NPLs which do not count NPLs that have been fullyprovisioned to 2% by the end of 2007.5
Figure 4. NPL ratio of commercial banks registered in Thailand, 1997Q4-2006Q4
0
10
20
30
40
50
60
70
1997Q4
Entire Banking system
Thai banks only
Percent of total loans
1998 1999 2000 2001 2002 2003 2004 2005 2006
2006 Q4= 8.0%
Source: BOT website (98Q2-06Q4); CEIC (97Q4 and 98Q1)
0
10
20
30
40
50
60
70
1997Q4
Entire Banking system
Thai banks only
Percent of total loans
1998 1999 2000 2001 2002 2003 2004 2005 2006
2006 Q4= 8.0%
Entire Banking system
Thai banks only
Percent of total loans
1998 1999 2000 2001 2002 2003 2004 2005 2006
2006 Q4= 8.0%
Source: BOT website (98Q2-06Q4); CEIC (97Q4 and 98Q1)
In 2006, the solvency position of Thai commercial banks improved further
(Figure 5). Although one banks capital adequacy ratio fell below the regulatory
minimum of 8.5%, the Tier 1 and the total capital adequacy ratios of Thai commercial
banks as a whole rose from 10.0 and 13.2 at the end of 2005 to 10.9 and 13.8 at the
end of 2006, respectively.
5The ratio of net NPLs to total loans of Thai banks at the end of 2006 was 4.5%. No historical figure is
available. For prudential purpose, the relevant NPLs are the net ones. This is because there is no furtherimpairment on banks' capital from the portion of NPLs that have been fully provisioned. From a profitability pointof view, however, keeping NPLs that are fully provisioned on its balance sheet entails a carrying cost for a bank.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
10/39
9
Figure 5. Total and Tier 1 capital as percent of risk-weighted assets of commercial
banks registered in Thailand, 1997-2006
7.928.48
7.5
8.91 8.939.57
9.019.98
10.9210.46
11.97 11.39
13.28 12.9613.43
12.36
13.2513.85
7.34
9.23
0
2
4
6
8
10
12
14
16
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Tier 1 capital Total capital
Source: BOT website
A look at aggregate data alone often does not give a complete picture of
industry-wide performance, for they are to a large extent driven by the performance of
large banks. Table 2 looks at key financial ratios of Thai commercial banks by five
subgroups: large private banks, medium-sized private banks, small private banks,
state-owned banks, and foreign-owned Thai banks. All ratios in the table are taken or
calculated from individual banks 2006 audited financial statements which are
available to the general public.
Table 2.2006 key financial ratios of Thai banks by subgroup
Largeprivate
banks
Mediumprivate
banks
Smallprivate
banks
State-owned
banks
Foreign-owned
banks
Number of banks 3 3 3 3 2
Share of total assets (Thai banks only) 46% 22% 3% 24% 5%
ProfitabilityROA 1.4% -0.4% 2.2% 0.1% 1.1%PPP 2.5% 0.9% 2.5% 1.6% 2.8%ROE 14.0% -6.5% 10.2% -13.7% 10.8%
NIM 3.5% 2.5% 3.9% 3.1% 4.3%Yields on interest earning assets 5.9% 6.1% 7.6% 6.5% 7.7%Funding costs 2.5% 3.5% 4.7% 3.0% 3.0%Net interest spread 3.5% 2.6% 2.9% 3.6% 4.7%
EfficiencyCost to income 52.8% 78.1% 59.0% 62.1% 58.6%Operating expenses to average assets 2.8% 2.6% 3.3% 2.4% 3.4%Non-interest income to total income 24.7% 14.4% 20.5% 14.3% 21.0%
Asset quality and solvencyNPL ratio 7.5% 7.1% 11.6% 6.1% 7.0%Net NPL ratio 3.6% 4.3% 6.0% 4.3% 2.9%CAR 14.5% 11.1% 25.8% 10.8% 15.2%
Note: (1) Simple average(2) Data from consolidated financial statements except for SCBT and TBANK(3) NPL ratios are of solo (company) basis.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
11/39
10
(4) Large private banks: BBL, KBANK, SCBMedium private banks: BAY, TMB, TBANK
Small private banks: TISCO, KK, ACLState-owned banks: KTB, SCIB, BT
Foreign-owned banks: UOBT, SCBTSource: Thai banks 2006 annual reports; authors calculation
In terms of ROA, small private banks came ahead of the other four subgroups.
In terms of ROE, their performance was less impressive. This is because small
private banks have on their books an enormous amount of capital relative to their total
assets. Their capital adequacy ratio at the end of 2006 was three times above the
regulatory minimum. This raises a question whether they use their capital funds
efficiently. Nevertheless, to the extent that they had the highest NPL ratios in the
table, the high capital adequacy ratio may not be too overwhelming.
Perhaps the most unpleasant thing for small private banks is that they had the
highest funding costs (interest paid on average interest-bearing liabilities). This
reflects their small sizes and limited branch networks. The main reason that they
managed to do well in 2006 were higher yields from hire purchase and leasing
businesses, their traditional strength from the time they were finance companies. To
the extent that other banks can now also engage in these businesses, there is a
downside risk to future profitability of small private banks.
Overall, the large private banks appeared to perform best in 2006 relative to
the other subgroups, followed not-too-distantly by foreign-owned Thai banks. Large
private banks have the lowest funding costs which reflect their market dominance.
Had they not carried substantial NPLs on their books (which depressed their asset
yield), their performance would have been even more impressive. Foreign-owned
banks had higher NIM and net interest spread (the difference between yields on
interest-earning assets and the funding costs) than large private banks, but had higher
operating costs and provisioning expenses which brought down their profitability.
This indicates that economies of scale may play some roles here. Recall from Figure
1 that foreign-owned banks are much smaller than the large private banks.
Medium-sized private banks and state-owned private banks did not do as well
as the other three subgroups in 2006. Not only did they have the lowest return on
assets, but because they also had low NIM and high operating cost to income relative
to the rest of the industry. One bank in each subgroup made net profit losses in 2006
which turned the average ROE of both groups into negative territory. But the others
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
12/39
11
also did not fare much better. Moreover, their net NPL ratios indicate that both
medium-sized private banks and state-own banks may still have a lot more to do in
terms of extra provisioning under IAS39. The question of interest then is whether
these banks will be able to improve their performance going forward.
c. The changing business model6
The 1997 crisis made it necessary for Thai commercial banks to adapt and
develop in nearly every dimension of their operation. This subsection looks at
changes in Thai banks business structure, sales and services, distribution channels,
and risk management.
Before the crisis, Thai banks earned most of their income from lendingbusiness. Interest income accounted for nearly 90% of banks total income on
average between 1992 and 1996. Within the loan portfolios, the focus of most banks
was on large corporations. Such dependency made banks profit sensitive to an
economic downturn. Defaults by a few large borrowers meant huge damages to
income and capital base.
To achieve greater portfolio diversification, Thai banks have given more
importance to consumer loans and loans to small and medium enterprises (SMEs).
The proportion of consumer loans in Thai banks loan portfolio in particular rose from
13% in 1998 to 21% at the end of 2006. To reduce dependence on interest income,
non-interest income, especially fees and commissions, has been emphasized. Non-
interest income to total income of Thai banks averaged 22% during 2002-2006, up
from 10% during 1992-1996.
In terms of sales and services, cross-selling and customer segmentation was
generally rare before the crisis. The need to increase the bottom line amidst increased
competition after the crisis motivated Thai banks to cross-sell and move to a
customer-centric architecture where customer needs come first. Several banks have
adopted a customer relation management (CRM) platform to serve specific needs of
different customer segments.
With regards to distribution channels, the most visible change is probably
branch rationalization. Even the state-owned banks have fewer people in their
branches before the crisis. At the same time, Thai banks have aggressively used
6Most of the materials in this subsection are from Triratvorakul and Vacharachaisurapol, 2006
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
13/39
12
ATMs and sub-branches to increase points of service and lower cost-to-serve. Use of
mobile and internet banking also has an impressive growth albeit still small in total
volume.
Last but perhaps most important is the change in Thai banks risk
management. A good example is in the area of credit and credit risk management
processes which have become more systematic. Before the crisis, Thai banks
customer acquisition and lending approval was largely decentralized with branch
managers and regional managers making most of the decisions for loans of less than
ten million baht. While large loans were subject to board approval, there was
typically little time to perform comprehensive credit analysis at the headquarters. The
discretionary power of branch managers extended to pricing where relationship with
branch managers often determined the final pricing.
Figure 6. Comparison of Thai banks credit and credit risk management processes
before and after the crisis
- Analyze and
review credit by
themselves
- Relationship-
based pricing
Credit review
and approval
Operation
after credit
authorization
Headquarters
Board Board
Risk Management
Committee
Credit PolicyRoles and Responsibilities Roles and Responsibilities
- Analyze credit usingtools such as credit ratingand credit scoring
- Credit reviewingcommittee decides onlarge loans
- Formula-based pricing
with RAROC
Customer
information
Credit Policy
Credit review
and approval
Operation
after credit
authorization
Branches Headquarters
Sales team/branches
Relationship managers
Headquarters/
Regional centers
Customer
acquisition
Customer
acquisition
Before crisisBefore crisis TodayToday
Source: Triratvorakul and Vacharachaisurapol, 2006
After the crisis, most banks adopted a system where the main role of branches
is to find and maintain customers, leaving credit review and approval to the
headquarters. This creates transparency in the credit process as well as the system of
check and balance and specialization among different departments. In all banks, there
is now a risk management committee that sets credit risk policy and monitor banks
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
14/39
13
own risks. In several private banks, modern risk management tools such as credit
scoring, internal rating systems, and credit portfolio models have been adopted.
There is also an attempt to move towards risk-based pricing using RAROC (Risk-
Adjusted Return on Capital) or similar tools although success in this area has been
quite limited. These changes in Thai banks credit and credit risk management
processes are summarized in Figure 6.
An important caveat is that while the right panel of Figure 6 looks very much
like what one would have found in the case of any international best-practice bank,
the devil lies in the detail. For example, internal rating models of the large private
banks currently cover only a portion of their corporate loan portfolios. Nevertheless
this does not present as much a problem as the fact that certain banks lag significantly
behind in the adoption of modern credit risk management tools. The difference
between the good and the bad risk management will be most apparent during the
downturn of the business cycle.
2.2 The environment
As with the Thai commercial banking players, the environment in which they
operate continues to evolve. This subsection divides Thai banks operating
environment into macroeconomic environment, industry or competitive environment,
and regulatory environment. In contrast to the preceding subsection which for the
most part was backward looking, this subsection focuses on the changing environment
over the next 2-3 years along with their implications for Thai commercial banks.
a. Macroeconomic environment
After registering robust growth from 2002 to 2004, the Thai economy slowed
down moderately in 2005 and 2006. 2006, in particular, was a challenging year for
the Thai economy as it was buffeted by a number of negative shocks. These included
political uncertainties, high oil prices, and severe flooding in many provinces. As a
result, domestic demand softened markedly. The economy however managed a
respectable growth rate of 5% for the year with the help of robust exports on the back
of a strong global economy.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
15/39
14
Figure 7.Thailands GDP real growth forecast
Source: Bank of Thailand Inflation Report, April 2007
Figure 7 shows the medium-term forecast of real GDP growth of the Thai
economy published by the Bank of Thailand in April 2007. The figure suggests an
economy on a moderate growth path. The growth is expected to come mainly from
exports, given healthy global conditions, additional government spending, and lower
oil prices.
Meanwhile, both internal and external stability appears well under control.Low unemployment and inflation rates are expected to continue in the medium term.
On the external front, the current account is expected to be in surplus at least till 2008,
which is a sharp contrast with the pre-1997 situation. International reserves have
risen to over 70 billion US dollars, keeping the ratio of reserve to short-term debt in a
highly comfortable position.
Thus, the economy looks to be in a sustainable expansion, albeit not as fast as
those recorded during 2002-2004. There is virtually no sign of a recurrence of the
crisis of 1997 type. Of course, there are downside risks to growth, most notably if the
world economy tanks. Although unlikely, this could easily happen if the US dollar
collapses or the Chinese economy goes into a hard landing. The Thai economy is
particularly vulnerable to these adverse events because of its heavy reliance on
exports as driver of growth.
But even if the Thai economy does proceed along the projected trajectory in
Figure 7, things will likely be less rosy for the commercial banks. This is because
private consumption and private investment, the major drivers of commercial banks
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
16/39
15
revenues, are not expected to show a significant pickup until the second half of 2008.
In fact, there is a possibility that 2006 could be a short-term peak in Thai banks
performance. Against this backdrop, effective credit risk management will be
essential for banks to maintain a healthy bottom line going forward.
b. Industry environment
Jittamai, Nakornthab, and Poshyananda (2005) describe in detail four major
changes in Thai commercial banks industry environment that have taken place after
1997. The four changes are disintermediation by the capital markets, the increased
role of specialized financial institutions (SFIs), the rise of non-bank financial
institutions, and heightened competition from foreign banks. This subsection reviews
each of the changes briefly along with their implications for Thai commercial banks
going forward.
Figure 8. Composition of Thai financial system
1996 2006
Financial institution loans Corporate bonds
Public-sector bonds Stock market
69%
3%
26%
2%
44%
19%
31%
6%
1996 2006
Financial institution loans Corporate bonds
Public-sector bonds Stock market
69%
3%
26%
2%
44%
19%
31%
6%
Note: (1) Financial institution loans = loans extended by commercial banks, finance and credit fonciercompanies, and specialized financial institutions
(2) Outstanding domestic bond value at par
(3) Stock market capitalizationSource: BOT website; Thai Bond Market Association
The first and perhaps also the most important element of Thai banks industry
environment is the structure of the financial system. Like those in most other Asian
economies, Thailands financial system is bank-based, with commercial banks being
the major providers of funds for the domestic economy. Nevertheless, since the 1997
crisis there has been a gradual shift towards greater capital market financing. Figure 8
shows the structure of the Thai financial system at the end of 1996 and 2006,
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
17/39
16
respectively. Although not a perfect proxy7, it is quite obvious that the Thai financial
structure today is becoming more balanced. This trend is expected to continue in the
immediate future.
The decline in the significance of financial institutions in the Thai economy
seen in Figure 8 is due partly to the problems facing these institutions in the aftermath
of the 1997 crisis and partly to the authorities effort to promote the development of
capital markets. In the case of commercial banks, a huge pile of NPLs and balance
sheet weakness had led to a contraction in bank loan supply, making capital market an
attractive financing alternative, or in some cases the only choice, for certain firms.
One important lesson Thailand has learned a hard way from the 1997 crisis is
the need to have a developed capital market that can act as a spare tire when the
banking sector fails to perform its intermediary function. It is therefore no surprise
that capital market has received a high priority in the Thai authorities effort on
financial system reform. Three capital market development plans were launched in
2000, 2003 and 2006. The latest, Thailands Capital Market Development Master
Plan 2006-2010, targets the corporate bond market as well as equity. Perhaps one of
the most aggressive measures in this plan is a liberalization of brokerage commission
fees in 2010 as a preparation for the full liberalization of the entire securities industry.
Several observers see the growth of the equity and bond market as a major
threat for Thai commercial banks. This paper takes a different view and argues that
the net effect of capital market growth is positive for Thai commercial banks. While
disintermediation inevitably hurts lending, capital market development provides
banks with several income-generating opportunities. The most obvious is the bond
market where Thai banks are the major players. League tables published by the Thai
Bond Market Association shows Thai banks consistently dominate the lists of top
dealers, underwriters, and registrars of domestic bonds. In addition, Thai banks are
also occasional issuers of corporate bonds. All of these mean that Thai banks stand to
gain handsomely as the bond market grows.
7Though often used to describe financial structure, market capitalization may overstate the importance
of the stock market in the economy. A notable example is Thailand in 1993 where stock marketcapitalization exceeded bank loans and led Demirguc-Kunt and Levine (1999). to wrongly concludethat Thailand had a market-based financial structure.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
18/39
17
Although Thai banks are prohibited to directly participate in equity securities
business, many own securities and asset management companies. As a matter of fact,
securities and asset management company subsidiaries of the large private banks are
among leaders in their respective industries. Thus, on a consolidated perspective,
disintermediation is more like a shift in revenues from interest income to fees and
services income. Of course, such capital market benefits depend on how universal
a particular bank is.
Additionally, because all but one Thai banks are listed companies, equity
market growth offers them a number of indirect financial benefits. First, as the Thai
stock market grows, the cost of equity for listed firms is likely to fall. Second, a
healthy stock market enables them to raise more capital easily. And third, they couldin principle use their market capitalization in merger and acquisition activities.
One promising area that cannot be overlooked is wealth management.
Globally, wealth management for high-net worth customers is the fastest growing
business segment for banks. We have not seen this happening in Thailand yet. But it
is conceivable that it is just a matter of time for the wealth management industry to
take off if the Thai capital market continues to deepen.
Lastly, a developed capital market offers two important indirect benefits for
Thai commercial banks. First, a deep capital markets promotes overall financial
system development which is good for economic growth. See, among others,
Demirguc-Kunt and Levine (2001). Second, capital market development contributes
towards a more stable financial system and an economy which is more resilient in the
presence of shocks.
Figure 9 breaks down financial institution loans at the end of 1996 and 2006
into loans from commercial banks, loans from finance companies and credit foncier
companies, and loans from special financial institutions (SFIs). Credit foncier
companies are finance companies that specialize in property lending. SFIs are
government-owned development financial institutions that provide financial
assistance to specific sectors of the economy. Five major SFIs are Government
Housing Bank, Government Savings Bank, the Bank for Agriculture and Agricultural
Cooperative, the Export-Import Bank of Thailand, and SME Bank.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
19/39
18
Figure 9.Breakdown of financial institution loans
1996 2006
Commercial banks Finance and credit foncier cos SFIs
70%
22%
8%
78%
1%
21%
1996 2006
Commercial banks Finance and credit foncier cos SFIs
70%
22%
8%
78%
1%
21%
Source: BOT website
After the 1997 crisis, the role of SFIs in the Thai financial system increased
significantly. The government has used SFIs to fill the gap voided by troubled banks
and finance companies as well as to stimulate the battered economy, especially at the
grass root level. Compared to commercial banks, SFIs are more lax in lending
discipline. Part of this is due to the so-called policy-directed lending, but primitive
credit risk management capabilities also play a major role. For the most part,
however, this does not present a problem to commercial banks as many of SFIs
customers (mostly the poor and farmers) do not belong to their target groups. A
major exception is SMEs. Weak lending discipline by SFIs effectively distorts the
market and represents one barrier for commercial banks to implement credit risk
management for their SME customers.
Not included in Figure 9 is the amount of loans extended by non-banks or
more precisely non-deposit-taking consumer finance specialists. These players
include global names such as Aeon, American Express, Cetelem, and Citiloans, as
well as local ones. Non-banks operations cover primarily three businesses: hire-
purchase, credit cards, and personal loans. An average customer of non-banks has
lower income than that of commercial banks, but there exists a material overlap
between their customer portfolios.
Before 2002, non-banks were not regulated. The Bank of Thailand viewed
regulation of these companies unnecessary as they do not pose systematic risk to
depositors. As the Thai economy recovered however, the influence of non-banks in
the Thai consumer finance market grew significantly. Concerning that their explosive
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
20/39
19
growth might have led to financial instability (in the case of the credit card business)
and excessive buildup of household debt, the BOT issued a series of prudential
guidelines on credit card loans in 2002, 2004, and 2006 and took personal loan
business under its supervision in July 2005 on the ground of consumer protection.
Among the regulations which apply to banks as well as non-banks are minimum
income of cardholders, ceiling on interest and other charges, and a maximum credit
limit for a particular borrower.
Despite the increased regulatory burden, non-banks continue to expand their
influence. Figure 10 shows outstanding amounts of credit card loans and personal
loans extended by banks and non-banks from the first quarters that non-bank data in
respective markets are available. As of 2007Q1, non-banks accounted for 46% ofcredit card loans outstanding (up from 40% in 2002Q4) and 53% in personal loans
outstanding (up from 51% in 2005Q2).
Figure 10. Outstanding values of credit card and personal loans under BOT
supervision
0
20
40
60
80
100
05 Q2 05 Q3 05 Q4 06 Q1 06 Q2 06 Q3 06 Q4 07 Q1
Banks Non-banks
0
20
40
60
80
100
02Q4
03Q1
03Q2
03Q3
03Q4
04Q1
04Q2
04Q3
04Q4
05Q1
05Q2
05Q3
05Q4
06Q1
06Q2
06Q3
06Q4
07Q1
Banks Non-banks
Credit card loans Personal loansBillion baht Billion baht
0
20
40
60
80
100
05 Q2 05 Q3 05 Q4 06 Q1 06 Q2 06 Q3 06 Q4 07 Q1
Banks Non-banks
0
20
40
60
80
100
02Q4
03Q1
03Q2
03Q3
03Q4
04Q1
04Q2
04Q3
04Q4
05Q1
05Q2
05Q3
05Q4
06Q1
06Q2
06Q3
06Q4
07Q1
Banks Non-banks
Credit card loans Personal loansBillion baht Billion baht
Source: BOT website (credit card loans); BOT internal data base (personal loans)
The BOT internal data shows that, in addition to faster growth, non-banks as a
group has a lower NPL rate in personal loans than commercial banks. The difference
in NPL rates also hold in the case of credit card loans (Vanikkul, 2006). This is an
interesting statistics in itself because low-income customers are the most sensitive to
deteriorating economic condition. While faster growth and a lower NPL rate do not
necessary correspond to superiority, there are reasons to believe that non-banks can
take on more risks than commercial banks. After all, several of these firms are global
players who have honed their skills and winning strategies in other markets. The
incumbent Thai banks, on the other hand, are relatively new to this market. It wasnon-banks that first found opportunities in this market segment and sparked the
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
21/39
20
subsequent lending boom. Perhaps the best example of non-banks differing strategy
is their treatment of loans that miss payments. While non-banks have a higher
proportion of delinquency loans than commercial banks which reflects the greater
riskiness of their portfolios, they do not allow these loans to lapse more than three
months to be counted as NPLs. Their aggressive write-off and debt collection policies
along with high interest rates and fees allow them to go for high-risk customers.
Going forward, competition in the consumer finance market is expected to
become fiercer as the softened economy slows down the now crowded market. Some
banks, however, have managed to avoid direct competition with non-banks in this
market by launching their own non-banks or by forming strategic alliances with non-
banks themselves. Others will have to find ways to respond to increased competition.
The final element of Thai banks industry environment is heightened
competition from foreign banks. Although it was a foreign bank which jumpstarted
commercial banking in Thailand in 1888, foreign banks have played limited roles in
Thailands modern banking era. This is in sharp contrast to the life insurance industry
where American International Assurance controls roughly 45% of the markets total
premium. The main reason for the limited presence of foreign banks in Thailand has
to do with the Bank of Thailands regulations on foreign bank entry and branching.Today, with exceptions of Standard Chartered (Thai) and UOB (Thai) and a small
foreign bank registered as a foreign subsidiary, all other foreign banks are confined to
having one branch only.
But even foreign wholly-owned Thai banks are a relatively new phenomenon.
In an effort to stabilize the Thai banking system after the 1997 crisis, the Bank of
Thailand relaxed the 25%-ceiling on foreign ownership in Thai banks. In this
process, four commercial banks were sold during 1998 and 1999 to Standard
Chartered, UOB, DBS (merged their acquisition into TMB bank in 2004), and ABN
Amro (sold their acquisition to UOB in 2005). More recently, the Bank of Thailandallowed GE Capital to take a majority stake in Bank of Ayudhya in 2006 and sold its
FIDF holding in Bank Thai to TPG Newbridge in 2007. Another FIDF deal is also
said to be forthcoming.
Meanwhile, a few foreign bank branches have opted for organic growth during
the past ten years. Most notable are Citibank and HSBC which have also built an
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
22/39
21
impressive retail operation, particularly in credit cards, despite having only one
branch each.
Although business models of foreign bank branches are diverse, most of them
focus on corporate banking. Lending to large and medium-sized firms, structured
products, and foreign exchange and money market activities are typical businesses of
foreign bank branches.
Figure 11 illustrates the different compositions of Thai banks and foreign
bank branches loan portfolios. It is clear from the figure that the loan portfolio of
foreign bank branches heavily tilts towards corporate lending. The composition
becomes even more skewed if we exclude the two foreign retail giants, Citibank and
HSBC, from the picture.
Figure 11.Loan portfolio compositions of Thai bank and foreign bank branches as of
2007Q1
Thai banks Foreign bank branches
78%
9%
13%
89%
0.2%
10%Corporate loans
Credit card and personal loans
Housing loans (mortgages)
Thai banks Foreign bank branches
78%
9%
13%
89%
0.2%
10%Corporate loans
Credit card and personal loans
Housing loans (mortgages)
Corporate loans
Credit card and personal loans
Housing loans (mortgages)
Source: BOT website
Increased activities of foreign wholly-owned banks and foreign bank branches
are among the major factors that have catalyzed Thai banks changing business model
described in Section 2.1c. Nevertheless, because of their small sizes, foreign banks
are still marginal competitors of many Thai banks, except in certain products such as
credit cards and cash management. This competitive balance could change in the
future however if there is a change in regulatory regime that allows them to grow at a
faster rate than the current one, for which we turn to the next subsection.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
23/39
22
c. Regulatory environment
The 1997 crisis would not have inflicted such a deep wound on the Thai
commercial banking sector if the regulatory environment that will prevail in the next
two years had been in place then.8
This subsection describes the core elements of the
new regulatory environment, namely, the regulatory and the supervisory frameworks
that have already been or will be put in place by the end of 2008 along with the
supporting infrastructure.
An important milestone in Thailands post-crisis banking regulatory reform
was the initiation of the first phase of the Financial Sector Master Plan (FSMP) in
January 2004. Bank of Thailand (2006) provides background, rationales, and details
of the plan. The FSMP is a 10-year, medium-term development plan for financial
institution under the supervision of the Bank of Thailand.
The most visible outcome under the first phase (2004-2007) of the FSMP is
the rationalization of the structure and roles of financial institutions. A major
structural weakness of the Thai financial institutions system before the 1997 crisis had
been the presence of many high-risk finance (and credit foncier) companies. In some
way, finance companies risks were forced on them by the regulatory system that did
not allow them to raise funds in the form of deposits. Faced with higher costs, these
companies naturally resorted to high risk activities in order to generate higher returns.
One of the strategic objectives of the FSMP is to correct this structural weakness.
This has been accomplished by the removal of the regulatory boundary line between
commercial banks and finance companies businesses. Finance companies were then
asked to merge with their parent bands, merge with other finance companies to
become commercial banks or retail banks, or return their licenses.
Another major structural weakness of the pre-crisis regime was the
International Banking Facilities (IBFs), mentioned in Section 2.1a. It was IBFs that
fueled the pre-crisis lending boom in Thailand. IBFs attached to commercial bank
were asked to merge with their parents while stand-alone IBFs had to upgrade to
foreign full branch or subsidiary or to return their license. By March 2006, there are
no IBFs left in Thailand.
8It would probably not be able to prevent the crisis from happening, for there were also other root
causes in play.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
24/39
23
The establishment of foreign subsidiary is a new concept in Thailand and
represents the Bank of Thailands response to pressures for further financial
liberalization. Under the FSMP, foreign banks can operate as a full branch or a
subsidiary. Both full branch and subsidiary enjoy the same scope of business as Thai
commercial banks, but the latter can have four branches in addition to one head office
as opposed to the former which (by definition) has only one branch.
The Bank of Thailand initially hoped that major foreign players such as
Citibank and HSBC might have chosen to become a subsidiary. In the end, however,
only Taiwans Mega International Commercial Bank (formerly ICBC) did so.
Interviews with Citibank and HSBC conducted by Jittamai, Nakornthab, and
Poshyananda (2005) revealed that the two banks would instead like to have 20-40branches to be cost effective.
The Bank of Thailand has now moved to work on the second phase of the
FSMP which will further step up the pace of reform. The FSMP Phase II will aim at
increasing efficiency of the financial institution system so as to strengthen its
competitiveness and resiliency. An important element of the FSMP Phase II will be
the orderly but meaningful introduction of more competition into the system
between existing institutions and new entrants, domestic and/or foreign. The detailsof Phase II are expected to be finalized in the first quarter of 2008.
Another notable development on the regulatory front is the adoption of new
regulatory framework in line with the changing international standards. These
include, IAS39 (2006-2007), consolidated supervision (2007) and the Basel II Capital
Accord (yearend 2008).
IAS39 (International Accounting Standard 39, Financial Instruments:
Recognition and Measurement) concerns several accounting areas, but the one that
has affected Thai banks the most is the provisioning of NPLs. The required
provisioning amount under IAS39 is based on the difference between the outstanding
loans and the present value of their collaterals as opposed to the difference between
the outstanding loans and the appraisal value of their collaterals under the old BOT
rule.
To ensure a smooth adoption of IAS39, the Bank of Thailand has phased
IAS39 compliance in three periods according to the age of the NPLs: doubtful of loss
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
25/39
24
loans (loans overdue more than 12 months) by December 2006, doubtful loans (loans
overdue 6-12 months) by June 2007, and substandard loans (loan overdue 3-6
months) by December 1995). Nevertheless, the impact of IAS39 on banks net profit
was still quite substantial in 2006, as seen in Section 2.1b. It is expected that the
banking sector as a whole has to set aside 40-50 billion baht of additional provisions
in 2007 compared to 62 billion last year (Kasikorn Research Center, 2007a). After
2007 however, IAS 39 will improve the transparency and provision buffer against
impaired assets, significantly strengthening the banking sector.
With consolidated provision, the Bank of Thailand will be able to supervise
financial institutions on a consolidated basis, which has become increasingly
necessary in the era of financial conglomerates. Consolidated supervision will allowthe Bank of Thailand to better assess risks of banks more effectively.
The adoption of Basel II slated for end-2008 will raise the standard of risk
management of commercial banks. At the minimum, banks will have to hold
regulatory capital that better reflects the underlying risks of their business. The end
goal is however for banks to develop risk management culture and capability that
together allow them to manage their risks effectively. The Bank of Thailand has been
working with the banking sector on the implementation of Basel II in Thailand forseveral years. It is expected that the transition to the new capital regime will be
relatively smooth.
On the supervisory front, the Bank of Thailand has significantly strengthened
its supervisory capacity and monitoring practices. Risk-based supervision has been
adopted in place of rule-based supervision. A range of database and risk-management
system has been developed along with training programs for supervisors. This
includes the use of scenario analysis, an early warning system, and the publication of
quarterly macro-prudential indicators.
Finally, the Financial Institution Business Act (FIBA), expected to be passed
this year, will strengthen the Bank of Thailands supervisory power by unifying the
supervision of all types of financial institutions under its purview. The FIBA will also
give the Bank legal power to enforce consolidated supervision, Basel II, and prompt
corrective actions to address weakness in troubled banks.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
26/39
25
In terms of supporting infrastructure, three are particularly noteworthy. The
first is the legal process with regards to bankruptcy cases. The Bankruptcy Act has
been amended several times since 1998 to deal with NPL cases. The Central
Bankruptcy Court was established in 1999. The overall process from initial document
to the end of foreclosure sale has been shortened from 42-60 months to 26-35 months
(Kasikorn Research Center, 2007c).
The second important supporting infrastructure is the Deposit Protection
Agency (DPA) Act, expected to be passed this year, will replace the current blanket
deposit guarantee in place since 1997. The new system of limited-coverage deposit
insurance will be phased in over four years to allow banks and depositors to adjust to
the new framework. The establishment of the DPA should reduce banks moralhazard and introduce more market discipline to the banking sector by putting pressure
on banks to improve financial strengths if they want to attract and retain depositors.
The third is the National Credit Bureau (NCB), formed from a merger of two
credit bureaus in 2005. The NCB collects and warehouses debt and debt service
records provided by its member financial institutions. The NCBs database now
covers more than 10 million customers. Thus, the problem of the lack of information
about loans granting to one borrower by several institutions has been significantlyreduced. For example, in the area of housing loans, banks now routinely use
information from the NCB to ensure that a prospective customer does not have
excessive debt burden and also to prevent occurrences of double or triple mortgages.
3. Short-term risks and outlook
The Basel II Capital Accord specifies three major risk buckets of financial
institutions: credit risk, market risk, and operational risk. This section focuses
primarily on credit risk, by far the largest risk exposure of all Thai commercial banks.
Market risk in particular is small, as suggested by the ratio of market risk assets to
total risk assets. Excluding one bank with a sizable market risk exposure, the average
proportion of market risk assets to total risk assets for all other Thai commercial
banks at the end of 2006 was a mere one percent.
Before jumping to the credit risk issues of Thai commercial banks, it is worth
noting about Thai banks foreign exchange risks, however. One of the major
misconceptions by Thailands outsiders is that the 1997 crisis resulted partly from
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
27/39
26
currency mismatches on banks balance sheets. For example, McKinsey & Company
(2002) forcefully argues that Thai banks were vulnerable because they onlent foreign
funds to their domestic borrowers without proper hedging of foreign exchange rate
risks. The truth is, then as well as now, Thai banks were required by the Bank of
Thailand to keep their net foreign exposure in check. Instead, what the Bank of
Thailand and the banks themselves overlooked and is now a classic case study, is that
the mismatches in the real sector could feed back to the banks in the form of increased
credit risks.
In the short-term, i.e., this year and the next, the most important factor
affecting Thai banks risks and outlook is likely to be the not-so-favorable economic
environment. As mentioned in Section 2.2a, the Thai economy into the end of 2008 is
forecasted to be driven mainly by exports, with domestic demand particularly private
investment below trend growth. In such an environment, the pressure for
shareholders value creation will lead to intensifying competition among market
players. The combination of the not-so-robust economy and increased competition
presents an important challenge for all Thai commercial banks.
Week domestic demand affects banks in two major ways. First, it exerts a
downward pressure on loan growth. Second, it is likely to lead to more default
occurrences. Figure 12 plots year-on-year growth rates of total loans, corporate loans,
and consumer loans of Thai commercial banks against nominal GDP growth from
2004Q4 to 2007Q1. Over the period shown, Thai banks loan growth moved roughly
in tandem with nominal GDP growth, falling as the economy softened since 2006Q1.
Corporate loan growth, in particular, has slowed down markedly. As a matter fact, the
last time that corporate loans of Thai banks registered a negative growth was in 2003.9
On the other hand, consumer loan growth appeared little affected by the economic
slowdown. The robust growth in consumer loans partially offset the fall in total loan
growth resulting from corporate loans.
9Discontinuity in sectoral loan data in 2003Q4 prevents Figure 4 to goes back beyond the period shown.Nevertheless, that the last time corporate loan registered a negative growth was in 2003 can be inferred from theavailable data.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
28/39
27
Figure 12. Loan growth of commercial banks registered in Thailand versus nominal
GDP growth, 2004Q4-2007Q1
-5%
0%
5%
10%
15%
20%
25%
30%
04Q4 05Q1 05Q2 05Q3 05Q4 06Q1 06Q2 06Q3 06Q4 07Q1
All loans Corporate loans Consumer loans Nominal GDP growth
Source: BOT website
Given the economic outlook and the contemporaneous movement between
nominal GDP and total loans observed in Figure 12, Thai banks overall loan growth
in 2007 will likely be lower than that in 2006 and may not pick up much in 2008. The
implication from this is a downward pressure on banks interest income going
forward.
It should be noted that movements in bank loan growth are not entirely
demand driven. Banks also watch over their credit risks. As economic uncertainty
mounts, the probability that potential borrowers may not be able to repay their debt
increases. So banks may keep tap on new lending when their perceived risks of
borrowers increase.
An important indicator of the quality of banks loan books is NPLs. After
reaching a low of 8.0% at the end of 2006, Thai banks NPLs rose slightly to 8.1% in
2007Q1. Net NPLs also rose from 4.5% to 4.6%.
While banks NPL rates capture their overall loan portfolio quality, they are
generally not a good indicator of credit risks facing banks. In theory, one would like
to use the expected default rate of new loans for that purpose. In the absence of
public data, one rough proxy of bank credit risks would be the ratio of new NPLs to
total loans.10,11
10In a forthcoming study, Chantapant, Kritayakirana, and Nakornthab (2007) use a database available only to
supervisors to construct historical default rates of bank corporate borrowers.11One may be tempted to use the change in total loans outstanding in the denominator. There are at least twoproblems with this. First, the amount of new loans in a given period is the change in loan outstanding plus the sumof loan repayments, write-offs, and transfers. In a period when total loans outstanding is declining (the case of
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
29/39
28
Figure 13 plots the ratios of new NPLs and reentry NPLs (NPLs of loans that
have been previously restructured) to total loans of Thai commercial banks going
back to 1999Q4 when the data became available. The sum of the two ratios captures
roughly the default rates of Thai banks loan portfolios.
Figure 13.Ratios of new NPLs and reentry NPLs to total loans of commercial banks
registered in Thailand, 1999Q4-2007Q1
0.0%
0.3%
0.6%
0.9%
1.2%
1.5%
99Q4 00Q4 01Q4 02Q4 03Q4 04Q4 05Q4 06Q4
New NPLs Reentry NPLs
Source: BOT website
Excluding the temporary increase in reentry NPLs in the first half of 2003, the
credit environment facing banks appeared benign throughout the period shown.
Nevertheless, since the end of 2005, there seems to be an upward shift in the level
new NPL rates compared to the earlier period.
The upward drift in the new NPL rate is in line with Figure 14 which shows
the absolute and the relative amounts of special-mention loans of a subset of Thai
commercial banks at the end of 2004, 2005, 2006, and 2007Q1. Special-mention
loans are loans that are past due for more than one month, but less than three months.
So they are not counted as NPLs, which by the BOTs aging criteria refers to loans
that have been past due for more than three months.
Thai banks between 1998 and 2001), using changes in total loans instead of total loans as the denominator wouldresult in negative NPL rates. Second, NPLs in the respective period may have come from loans that have beenoriginated several periods ago.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
30/39
29
Figure 14.Special mention loans of Thai commercial banks
0
30,000
60,000
90,000
120,000
150,000
2004 2005 2006 2007Q1
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%Special mention loans Percent of total loans
Million baht
Source: Kasikorn Research Center (2007)
Changes in special mention loans are generally indicative of future changes in
new and reentry NPLs. Thus, together with the softened economic condition, Figure
13 suggests that more new and reentry NPLs are in the pipeline this year.
Despite potential increases in new and reentry NPLs, the overall NPL ratio of
Thai banks is expected to fall significantly this year. As mentioned in Section 2.2c,
Thai banks are required to set aside additional provisions in compliant with IAS39
this year. To reduce provisioning burden, banks are expected to transfer a substantial
amount of their NPLs to asset management companies (AMCs). Estimates by
Kasikorn Research Center (2007b) put the ratios of NPLs and net NPLs to total loans
between 4.0-5.5% and around 2% at the end of this year, respectively.
A major caveat is that, for banks with their own AMCs (five largest private
banks do), such NPL transfers merely represent a shift from a direct exposure on their
loan books to an indirect exposure through their subsidiaries. To the extent that their
AMCs make losses from the transferred loans, they will have to realize these losses
too. An efficiency issue aside, a bank with 20 billion baht of NPLs is no different
from a clean bank that owns an AMC (99.99% or 100%-owned) with 20 billion baht
of NPLs. Good analysts usually look at consolidated NPL figures when assessing a
banks capital vulnerabilities.
To gain a little deeper understanding of Thai banks credit risk, we look
separately at Thai banks corporate sector exposure and household sector exposure.
Figure 15 shows time series plots of selected financial ratios of non-financial listed
companies, often taken as a proxy of banks top-tier corporate customers. The figurereveals a very comfortable picture. Although the gross profit margin of non-financial
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
31/39
30
listed companies has been somewhat depressed recently, the other three ratios point
out to exceptional financial strengths, particularly in debt service capacity. Moreover,
since the crisis, many Thai private companies, including listed ones, have shied away
from foreign currency funding. Accordingly, the risk of currency mismatches turning
these firms into defaults like what happened during 1997-8 is remote. All these
backdrops suggest minimal credit risk coming from large corporate borrowers, at least
in the immediate horizon.
Figure 15.Selected financial ratios of non-financial listed companies
0
5
10
15
20
25
30
1999
2000
2001
2002
2003
2004
Q12005
Q2
Q3
Q4
Q12006
Q2
Q3
Q4
Q12007
0
1
2
3
4
5
1999
2000
2001
2002
2003
2004
Q12005
Q2
Q3
Q4
Q12006
Q2
Q3
Q4
Q12007
0
2
4
6
8
10
1999
2000
2001
2002
2003
2004
Q12005
Q2
Q3
Q4
Q12006
Q2
Q3
Q4
Q12007
Time Interest coverage ratio
Debt to Equity RatioTime
Gross Profit Margin
18.4
-6
-4
-2
0
2
4
6
8
10
12
1999
2000
2001
2002
2003
2004
Q12005
Q2
Q3
Q4
Q12006
Q2
Q3
Q4
Q12007
Percent Return on Assets
7.1
7.0
1.0
Average 1994-1996Average 1994-1996
Average 1994-1996
Percent
Average 1994-1996
0
5
10
15
20
25
30
1999
2000
2001
2002
2003
2004
Q12005
Q2
Q3
Q4
Q12006
Q2
Q3
Q4
Q12007
0
1
2
3
4
5
1999
2000
2001
2002
2003
2004
Q12005
Q2
Q3
Q4
Q12006
Q2
Q3
Q4
Q12007
0
2
4
6
8
10
1999
2000
2001
2002
2003
2004
Q12005
Q2
Q3
Q4
Q12006
Q2
Q3
Q4
Q12007
Time Interest coverage ratio
Debt to Equity RatioTime
Gross Profit Margin
18.4
-6
-4
-2
0
2
4
6
8
10
12
1999
2000
2001
2002
2003
2004
Q12005
Q2
Q3
Q4
Q12006
Q2
Q3
Q4
Q12007
Percent Return on Assets
7.1
7.0
1.0
Average 1994-1996Average 1994-1996
Average 1994-1996
Percent
Average 1994-1996
Source: SET; compiled by BOTs Monetary Policy Group
The lack of data on non-listed firms makes it difficult to draw similar
inferences in the case of smaller-sized corporate borrowers. Nevertheless, we know
that these firms, particularly the SMEs, are in general more sensitive to adverse
economic condition than their larger peers. This, together with the fact that SMEs
have been a focus of Thai banks loan expansion in recent years, makes middle-
market borrowers a potential source of corporate-sector credit risks for Thai banks.
At the same time, there are indications that household sector credit risks have
increased. The pace of growth in consumer loans during the past four to five years
has led to an increasing exposure of Thai banks to the household sector. While the
strength of household lending has been a boon for banks, a spate of defaults by
households would turn the situation around.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
32/39
31
Figure 16 traces the evolution of NPL ratios of Thai banks consumer loans
and their subcategories over the past four years. From 2003Q4 to 2006Q4, NPL ratio
of consumer loans came down significantly, reflecting an improving of banks
consumer loan portfolios. The situation is different in 2007Q1 when it went up
slightly on the back of increases in NPLs in the area of credit cards and housing loans.
Figure 16. NPLs of consumer loans, 2003Q4-2007Q1
0
4
8
12
16
20
2003Q4 2004Q4 2005Q4 2006Q4
Consumer loans Housing loans Credit card loans Personal loans
% of total loans
Consumer loans
Housing loans (mortgages)
Loans for personal
consumption
Credit card loans
Personal loans
Consumer loans
Housing loans (mortgages)
Loans for personal
consumption
Credit card loans
Personal loans
0
4
8
12
16
20
2003Q4 2004Q4 2005Q4 2006Q4
Consumer loans Housing loans Credit card loans Personal loans
% of total loans
Consumer loans
Housing loans (mortgages)
Loans for personal
consumption
Credit card loans
Personal loans
Consumer loans
Housing loans (mortgages)
Loans for personal
consumption
Credit card loans
Personal loans
Source: BOT internal database
Although it is too early to tell that this is a start of a new trend, given the state
of the economy, NPL ratios of consumer loans could rise further as the year
progresses. Nevertheless, because consumer loans are among the sectors with the
lowest NPL ratios, it is still a long way for their increases to pose threat to banks
stability. In addition, due to the Bank of Thailands prudential regulative on loans to
value (LTV) of mortgage loans, banks are more or less covered in the event of
borrower default. In fact, it would require a significant financial distress in the
household sector before banks potential losses from their consumer loan exposures
would pose a concern for financial stability.
Karnchanasai, Nakornthab, and Piamchol (2004) highlighted net properties
foreclosed on banks balance sheets as a potential source of additional risks for Thai
banks in the event of a property price collapse. Figure 17 plots the amount of net
foreclosed assets on Thai bank balance sheets and their percent of total assets from
1997:1 to 2007:4. Since mid 1999, Thai banks properties foreclosed have ballooned.
Most of these properties foreclosed were previously collateral of loans that had turned
sour. While their ratio to total assets has been trending since the beginning of 2006, it
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
33/39
32
remains well above 2%. For comparison, the corresponding figure for foreign bank
branches is 0.02%. Although a sharp decline in property prices look unlikely in the
immediate horizon, having such sizeable non-income-generating and highly illiquid
assets on balance sheets does entail hidden financial costs for Thai banks.
Figure 17. Net properties foreclosed of commercial banks registered in Thailand,
1997:1-2007:4
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
Outstanding value Percent of total assets Source: BOT website
In addition to slower loan growth, increased credit risks, and carrying costs of
net properties foreclosed, continued strengths in deposit growth of most Thai
commercial banks is another factor weighing down banks operating performance this
year. With low loan growth prospect, banks have parked their excess liquidity in the
money markets. Coupled with a series of policy rate reduction in the first half of this
year, this exerts a further downward pressure on both NIM and asset yields. We have
seen this already happened in 2007Q1. Adding IAS39 provision burden on top of that
and Thai banks net profitability in 2007 does not look very good.
Consistent with this outlook are analysts expectations of banks profitabilitythis year and the next. Table 3 shows that analysts expect earnings per share of half
of the Thai commercial banks in the table to fall against their 2006 values. All
commercial banks are however expected to do better in 2008 when IAS39 provision is
no longer an issue.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
34/39
33
Table 3.Averaged EPS forecasts of selected Thai banks as of July 6, 2007
2006A 2007F 2008F
Bangkok Bank 9.35 10.20 11.25
Kasikorn Bank 5.74 5.73 6.45
Siam Commercial Bank 4.64 5.10 6.01
TMB Bank -0.86 -0.17 0.21Bank of Ayudhya 0.58 0.59 1.45
Thanachart Bank 0.15 0.19 0.22
Tisco Bank 1.88 2.17 2.52
Kiatnakin Bank 3.98 3.36 3.66
ACL Bank 0.94 0.44 0.48
Krungthai Bank 1.26 1.20 1.51
Siam City Bank 2.02 1.45 2.18
Bank Thai -3.32 0.40 0.62
Note: Excludes UOB (Thai) which was delisted in August 2006 and Standard Chartered (Thai) whichis no longer traded.
Source: SAA Consensus (www.settrade.com)
4. Conclusions
Thai commercial banks have come a long way since 1997. Aided by strong
economic growth, consolidation and recapitalization efforts, improved risk
management, operational restructuring, and regulatory reforms, the sector has more or
less returned to stability by the end of 2006.
On the surface, the Thai banking sector does not appear to be much different
from its pre-crisis years. A deeper look at the players and their operating environment
reveals a very different industry dynamics, however. Among other things, this
implies that the risks facing Thai commercial banks have also changed from what
they were facing in 1996-1997.
After enjoying a smooth journey for the past several years, Thai banks have hit
a bump in the road in 2007. Most important from the financial stability perspective is
the thinner bottom line and increased credit risks. Nevertheless, there is no sign of
sector-wide distress. All banks are also expected to do better in 2008. Of course, theoutlook for Thai banks could change if the future macroeconomic and financial
environment significantly diverges from its expected course.
Looking forward, the major test for Thai banks will the introduction of greater
competition under the second phase of the Financial Sector Master Plan. While the
timing, the extent, and the speed of the planned liberalization will not be finalized
until 2008, it is not difficult to see from the assessment in this paper that some banks
are far more vulnerable than the others to the increased competitive pressure. These
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
35/39
34
banks will have to work harder than the rest to find ways to ensure their long-term
place in the Thai economy.
References
Bank of Thailand (2006). Thailands Financial Master Plan Handbook, August.
Bank of Thailand (2007). Inflation Report, April.
Chantapant, Sukonpat, Kritayakirana, Krongkaeo, and Don Nakornthab (2007). How
Vulnerable Are Thai Banks: A Structural Analysis of Bank Corporate Portfolios
and Implications, forthcoming.
Demirguc-Kunt, Asli and Ross E. Levine (1999). "Bank-Based and Market-Based
Financial Systems: Cross-Country Comparisons," World Bank Policy Working
Paper No. 2143, July.
European Central Bank (2006). EU Banking Sector Stability, November.
Jittamai, Pajongjit, Nakornthab, Don, and Roong Poshyananda (2005). Changing
Macroeconomic Environment and Financial Landscape: Challenged for the
Banking Sector, Bank of Thailands Discussion Paper No. 10/2005, November
(in Thai).
Karnchanasai, Chatsurang, Nakornthab, Don, and Suchot Piamchol (2004). Bank
Lending, the Housing Market, and Risks: A Test for Financial Fragility, Bank of
Thailands Discussion Paper No. 05/2004, November.
Kasikorn Research Center (2007a). Commercial Banking Business in 2007: Facing
Several Negative Factors, Current Issues, Vol. 13, No. 1943, January (in Thai).
Kasikorn Research Center (2007b). Bank Loan and NPL Trends during the Rest of
2007, Current Issues, Vol. 13, No. 1974, May (in Thai).
Kasikorn Research Center (2007c). Thai Economy 10 Years after Crisis: Lessons for
Thai Financial Institutions, Current Issues, Vol. 13, No. 1981, July (in Thai).
Krungthai Bank (1997). Key Financial Data of Thai Commercial Bank, 1988-1996.
McKinsey&Company (2002). Dangerous Markets: Managing in Financial Crisis,
Wiley Finance.
Santiprabhob, Veerathai (2003). Lessons Learned from Thailands Experience with
Financial Sector Restructuring, Thailand Development Research Institute,
November.
-
8/12/2019 Thai Commercial Banks One Decade After the Crisis
36/39
35
Vanikkul, Krirk (2006). Bank of Thailands Policies towards Development of the
Financial Institution System, paper presented at TDRI 2006 Yearend Conference,
December (in Thai).
Vichyanond, Pakorn (2007). Crucial Transition in Thailands Financial System,
paper presented at the Brookings Institutes Asian Economic Panel, April.
Appendix A. Implications for regional integration
This appendix looks at integration in banking services in Asia from a financial
stability perspective. In particular, it argues that policymakers should follow proper
sequencing of first ensuring the stability of the domestic banking sector and the
integrity of the regulatory and supervision framework before moving to full regional
(or international) integration. Where relevant, the findings in this paper are as cases
in point.
Integration in banking services generally takes two primary forms. The first is
cross-border provision of services, be internet banking or cross-border borrowing and
lending. The second is commercial presence, either through local subsidiaries or
equity stakes.
Different regions follow different approaches to integration. In Latin America,
the proliferation of foreign banks is the hallmark of the regions internationalized
banking sector. In contrast, intraregional cross-border bank flows are the main mode
of integration within the European Union. As a matter of fact, looking only at
percentage of total bank assets held by foreign banks would find little integration of
the EU banking sector. With some exceptions1, national banks overwhelmingly
dominate the markets in EU economies.
In Asia, integration in banking services