Analyst see bank earnings in Q2 to shrink by double digits as loan loss reserve and tighter credit markets takes toll

Thailand’s commercial banks are set to announce their 2nd quarter results in less than a week and analysts are already predicting that the quarter, which saw the country near a total standstill, is likely to have a major impact on the financial institutions’ earnings.

The commercial banks are among the 1st group of companies that are listed on the Stock Exchange of Thailand (SET) to report their earnings after each quarter and all eyes are set on the how this sector, which is key to the economic well-being of the country, is going to perform.

Thanadech Rungsrithananon, the Senior Vice President of UOB Kay Hian Securities (Thailand), said that the SET index will be range-bound between 1,346 support and 1,400 resistance and that the net profit of 10 banks is expected to be at 42-43 billion baht.

This he says would be a dip of up to 15-20 per cent from the figures seen during the same period last year and also during the 1st quarter of this year.

Thanadech is not alone in his predictions for a lower profitability of the financial sector. KGI Securities Plc has also come out to say that it expects the 2nd quarter earnings of the banking sector to see a contraction of up to 25 per cent. The firm cites the higher loan loss reserves that the banks may have to provision for due to the rise in non-performing loans (NPLs) from the economic impact of the pandemic.

The coronavirus pandemic has taken a major toll on the economy as companies look to cut costs and tourism, which makes up to 18% of the gross domestic product (GDP), has been at a standstill during the 2nd quarter of the year.

The coronavirus has also lead to widespread layoffs and it is estimated that as many as 9 million Thais are likely to lose their jobs from the ongoing pandemic, especially in the tourism related sector.

The government on its part has been trying to mitigate the problems and has offered cash assistance but that is set to run out soon and KGI Securities said that relief measures and assistance measures have caused the bank’s asset problems to extend until the end of 2020.

Due to the large number of borrowers applying for participation in the measures to delay the payments, KGI foresees that most banks will prepare for higher loan loss reserves for the NPL risk after the assistance measures end.

As per the research KGI predicts that banks with high exposure to the Small & Medium Sized Enterprises (SME) loans such as Kasikorn Bank (KBANK) and TMB Bank will increase loan loss reserves. KBANK will increase by 2.50% (from the bank’s full year target of 1.50%) and TMB at 1.60% (from Bank’s full year target of 1.20-1.30%).

State owned Krung Thai Bank (KTB) is expected to be at 1.70%, including special credit cost for Thai Airways debt. While Siam Commercial Bank and Bangkok Bank are expected to be at 1.80% and 1.20%. Only TISCO is expected to reduce its loan loss reserves as a large amount has been set to support bad debts since the first quarter of 2020.

Most major bank loans grew robustly due to the volatile bond market. As a result, many private companies are unable to refinance debentures at a lower cost because of bank credit growth from bond market fluctuations. The demand for loans to be used as capital for the business sector has increased.

Reducing interest rates on savings and the reducing cost to the Deposit Protection Agency will help most banks to keep their margins at the same level as quarter on quarter (QoQ). KGI securities foresee profit in Q2/2020 to drop 14% QoQ and 25% year-on-year (YoY).

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