Thailand: Fitch sees higher earnings ahead for banks

Fitch Ratings expects higher earnings in the Thai banking sector, in line with the country’s economic recovery, with loan-loss reserves in the industry having peaked.

Earnings in the Thai banking sector are forecast to continue to improve, driven by the economic recovery and reduced, though still elevated, provisioning, Fitch Ratings’ senior director and head of South and South-East Asia banks ratings Tania Gold said at an annual seminar in Thailand on Tuesday.

Improving business activities and higher loan demand will facilitate banking business growth, even though the Thai economy will rebound gradually. The tendency towards higher net interest margins, in accordance with the Bank of Thailand’s policy rate hikes, would also support the banking sector’s revenue growth, she said.

“We see a gradual recovery in banks’ profitability during 2022, albeit with the upside capped by still-weak economic growth. As a result, we rated an improving outlook for the banking sector,” Ms Gold said.

According to this month’s Fitch Ratings banking outlook for 17 Asia-Pacific countries, six countries have improved, including Thailand.

The rating agency affirmed Thailand’s long-term foreign currency issuer default rating at BBB+ with a stable outlook. Only Vietnam is rated with a positive outlook, while two countries in the region have a negative outlook.

Ms Gold said earnings in the Thai banking sector would be supported by falling credit costs, while the industry has been lowering provisions for loan losses. Banks have been aggressively provisioning in recent years.

However, Fitch expects impaired loans to increase as pandemic relief measures taper off. The rising interest rate trend could also affect asset quality, and particularly impact vulnerable segments.

Roughly 11% of loans remained under regulatory relief measures as of March this year, while small and medium-sized enterprises are likely to be the most vulnerable segment.

A strong capital base and loan-loss provisions are the key buffers allowing banks to handle unexpected situations and the downside risk of asset quality. In addition, Ms Gold said the solid financial status adds to the rating strength of the Thai banking sector.

For the first quarter of 2022, the Thai banking sector reported a solid tier-one capital base of 15.5%, according to Fitch data.