2020 was another challenging year for Thailand as economic conditions continue to deteriorate, putting pressure on commercial banks’ profitability and asset quality
Thailand has been adversely impacted by the COVID-19 pandemic as its economy is greatly exposed to trade and tourism. The disruptions in global trade have further contracted Thailand’s export activities from -2.7% in 2019 to around -6% in 2020. Meanwhile, the lockdowns and closing of borders have left the country’s tourism sector vulnerable. Tourism contributes to around 12% to 15% of gross domestic product (GDP). As a result, the economy is projected to drop to -7.1% in 2020.
Private consumption dipped from 4.5% in 2019 to -2.3% in 2020 due to unemployment, low consumer confidence and a lacklustre business environment. Interest rates remained low as Thailand’s Monetary Policy Committee (MPC) continued to cut rates to 0.50% to cushion the economic slowdown.
Given to the difficult operating environment, Thailand’s banking sector saw another year of challenges. The profitability of the banking system declined to $4.35 billion (THB 130.4 billion) in the first nine months of 2020 from $7.15 billion (THB 214.4 billion) in the same period in 2019. Banks set aside higher loan loss provision to soften the effects of loan quality deterioration of $26.09 billion (THB 782.5 billion) with a non-performing loan (NPL) coverage ratio of 149.7%. The return on assets (ROA) also decreased to 0.52% in the third quarter (Q3) of 2020 from 1.98% in Q3 2019.
The Bank of Thailand, the country’s central bank, also reported a gradual expansion in consumer loans as the government eased lockdown measures. As of Q3 2020, consumer loans, which accounted for 35.4% of the total loan, increased by 4.8% year-on-year (YoY). Mortgage lending particularly recovered as demand for low-rise residential properties increased. Corporate loans also saw muted growth at 4.5% YoY as small and medium sized enterprise (SME) loans picked-up due to the government’s soft loan scheme.
In terms of loan quality, NPL increased to 3.14% in Q3 2020 compared to 3.0% in the same period in 2019. Debt relief measures and revisions to rules on loan classification and provisioning were able to slightly mitigate the credit risks of banks. Meanwhile, banks continued to maintain a high level of capitalisation with the capital fund of the banking system totalling $98.71 billion (THB 2,959 billion), translating to a capital adequacy ratio (CAR) of 19.8% as of Q3 2020.
Despite the turbulent year, Thailand’s commercial banks were able to remain resilient especially Bangkok Bank which topped the AB500 Ranking 2020. The bank did not only emerge as the largest bank based on assets, but also the bank with strongest balance sheet based on a stable performance with a return on equity (ROE) of 5.2% and CAR of 16.5%. However, the bank saw one of the highest NPL ratios among its peers.
Looking ahead, Thailand’s road to recovery will most likely be a slow one depending on global conditions, opening up economies, and the success of COVID-19 vaccination programme. Specifically, for the banking sector, financial institutions are expected to maintain a high level of prudence and capital to continue to protect their market positions during this vulnerable period