• Published on 22 March 2022
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Four Thai banks downgraded as structural issues persist; Outlooks Stable 

S&P Global Ratings has lowered its ratings on  Siam Commercial Bank (SCB) and  Kasikornbank (KBank) to 'BBB' from 'BBB+', and on  Krungthai Bank (KTB) and  TMBThanachart Bank (TTB) to 'BBB-' from 'BBB', reflecting its view that systemic risks have increased for banks operating in Thailand. 

At the same time, we affirmed our 'BBB+' ratings on  Bangkok Bank and  Bank of Ayudhya (BAY). We have revised down the stand-alone credit profiles of all six banks by one notch. The outlooks on all the banks are stable. 

Systemic risk for Thailand's banks has risen and high leverage among borrowers is likely to persist for longer than we previously expected. Regulatory relaxation, such as a loosening of loan-to-value ratio requirements for mortgages, or an absence of any concrete action to rein in high household debt would delay a resolution of structural issues, in our view. In addition, the economic recovery remains fragile and uneven across sectors, especially in tourism, which remains well below pre-pandemic levels. The crisis in Ukraine could also further delay the normalisation of international tourist arrivals in Thailand.

Steps taken by the government and central bank should reduce risks for the country's banks, but it won't eliminate them. We view Thailand's relief programmes (including loan classification norms) as more liberal than those of peer countries. There is an increasing divergence in economic reality and reported asset quality ratios. The banking sector's reported non-performing loan (NPL) ratio has remained relatively stable at about 3%, supported by ongoing relief measures. In our opinion, regulatory forbearance is just prolonging the pain of underlying problem loans. At 14%, the high proportion of banks' loan books under relief measures points to incipient problems in the system. 

Our base case projects an orderly unwinding of imbalances. We expect the Thai banking sector's NPLs to rise gradually over the next 24 months to 5%, the highest since the 2008 global financial crisis. Indeed, it may take longer. Restructuring would provide a temporary lifeline to the borrowers and slow NPL growth. But it will not resolve the structural problems in the system. In the absence of any effective measures to reduce the high household debt burden, borrowers will remain dependent on better economic conditions and low interest rates to service their obligations on time.

We see a one-in-three possibility that economic risks will increase for Thai banks. That said, all the Thai banks we rate now have stable outlooks. This is because the banks are maintaining good capitalisation and healthy provision coverage ratios, which should offer some cushion. 

We affirmed the ratings on Bangkok Bank and BAY because, although their stand-alone creditworthiness is affected by rising systemic risk, both the ratings have buffers. Bangkok Bank's high systemic importance in Thailand offsets this risk. Likewise, BAY benefits from being a highly strategic subsidiary of Mitsubishi UFJ Financial Group Inc., and group support continues to uphold the ratings, which are constrained by the sovereign rating on Thailand. 

Krungthai Bank
(Primary credit analyst: Nancy Duan)

The stable outlook on KTB reflects its adequate market position, sufficient capital, and funding buffers. It also reflects its improving credit underwriting standards and high provision buffer that could help to offset potential downside related to COVID-19 weak loans. We believe credit risks in the Thailand banking sector could increase further if the economic slowdown is significantly more severe or prolonged with increased permanent credit impairment of the household and small and midsize enterprise (SME) sector than our base case forecast. Our ratings on KTB already factor in some forward-looking asset quality stress from the uneven economic recovery and vulnerable borrower groups over the next 12 to 24 months.

Downside scenario

We could downgrade KTB over the next 12 to 24 months if we believe credit conditions faced by banks operating in Thailand could deteriorate materially beyond our base case.

Upside scenario

We could raise the rating if we considered asset quality risk to have improved materially for Thai banks. This improvement could happen when we believe there is materially reduced risks of restructured loans lapsing into NPLs, which in turn is dependent on the economic recovery becoming more broad-based and entrenched, especially in the tourism and SME sectors. This should be accompanied by a sustainable reduction in weak loans, including restructured and stage 2 loans.

Kasikornbank
(Primary credit analyst: Ivan Tan)

The stable outlook on KBank mainly reflects the bank's strong market position as one of the largest banks in Thailand, its good capitalisation, stable deposit base, and the likelihood of government support. The ratings on KBank already factor in some deterioration in the bank's asset quality over the next 12 to 24 months.

Downside scenario

We could downgrade KBank in the next 12 to 24 months if we believe credit conditions facing banks operating in Thailand will deteriorate significantly beyond our current expectations, causing weak loans and credit costs to materially exceed our current forecasts. 

Upside scenario

We could upgrade KBank if we considered asset quality risk to have improved materially for Thai banks. This improvement could happen when we believe there are materially reduced risks of restructured loans lapsing into NPLs, which in turn depends on the economic recovery becoming more broad-based and entrenched, especially in the tourism and SME sectors. This should be accompanied by a sustainable reduction in weak loans, including restructured and stage 2 loans.

Siam Commercial Bank
(Primary credit analyst: Ivan Tan)

The stable outlook on SCB reflects its good capital ratios, strong business position, and elevated provision coverage to buffer against weak loans from the COVID pandemic. Credit risks could increase if the economic slowdown is significantly more severe or prolonged, with more permanent scarring of the household and SME sectors than our current forecast. The rating factors in some deterioration in asset quality over the next 12 to 24 months.

Downside scenario

We could downgrade SCB in the next 12 to 24 months if we believe economic conditions facing banks operating in Thailand will deteriorate significantly beyond our current expectations, leading to higher-than-expected NPLs and credit losses.

Upside scenario

We could upgrade SCB if we considered asset quality risk to have improved materially for Thai banks. This improvement could happen when we believe there are materially reduced risks of restructured loans lapsing into NPLs, which in turn depends on the economic recovery becoming more broad-based and entrenched, especially in the tourism and SME sectors. This should be accompanied by a sustainable reduction in weak loans, including restructured and stage 2 loans.

TMBThanachart Bank
(Primary credit analyst: Ivan Tan)

The stable outlook on TTB reflects our view that the bank will maintain its strong consumer and retail franchise and high systemic importance in the Thai banking industry. The ratings also factor in some deterioration in the bank's asset quality over the next 12 to 24 months as relief measures unwind.

Downside scenario

We could downgrade TTB in the next 12 to 24 months if we believe economic conditions for banks operating in Thailand will deteriorate significantly beyond our current expectations, leading to higher-than-expected NPLs and credit losses.

Upside scenario

We could upgrade TTB if we considered asset quality risk to have improved materially for Thai banks. This improvement could happen when we believe there are materially reduced risks of restructured loans lapsing into NPLs, which in turn depend on the economic recovery becoming more broad-based and entrenched, especially in the tourism and SME sectors. This should be accompanied by a sustainable reduction in weak loans, including restructured and stage 2 loans. 

Bangkok Bank
(Primary credit analyst: Ivan Tan)

The stable outlook on Bangkok Bank reflects our view that the bank will maintain its strong market position and deposit franchise and high systemic importance in the Thai banking industry. The ratings already factor in some deterioration in the bank's asset quality over the next 12 to 24 months.

Downside scenario

We could lower our ratings if the bank's asset quality deteriorates substantially, or if we believe economic conditions for banks operating in Thailand will deteriorate significantly beyond our current expectations.

Upside scenario

We see limited rating upside for Bangkok Bank over the next two years because the ratings are on par with the foreign currency sovereign rating on Thailand.

Bank of Ayudhya
(Primary credit analyst: Nancy Duan)

The stable outlook on BAY reflects our expectation that the bank will remain a highly strategic subsidiary of Mitsubishi UFJ Financial Group Inc. over the next 12 to 24 months. The outlook also reflects our view that the rating on BAY will remain constrained by the foreign currency sovereign credit rating on Thailand.

We see a low probability that the rating on BAY will move either upward or downward in the next 12 to 24 months.

Re-disseminated by The Asian Banker