Rising NPLs in the financial sector takes its toll on the Thai economy

By Suppakorn Araam-arunsri

The much talked about gloom and doom in the country’s financial sector may have been overstated by the media and analysts as the latest third-quarter results indicate but rising NPLs are beginning to take its toll on the economy.

Although most major financial institutions reported a sharp drop in profitability year-on-year, the numbers for quarter-on-quarter were not as bad. Thailand’s top financial institutions reported profits in the 3rd quarter which saw a decline as much as 31 per cent year-on-year.

The decline in the profitability was coupled with a slight increase in non-performing loans (NPLs) during the 3rd quarter of the year, likely a knock-on effect of a slowing economy and the impact of the fallout from the ongoing Covid-19 outbreak.

Brokers have come out to say that 8 of the larger banks posted aggregate Q3 2020 earnings of 29.1 billion baht, down by 44.8 per cent year-on-year (YoY) and 1.4 per cent quarter-on-quarter (QoQ).

The sharp decline was mainly due to higher loan loss provisions and operating expenditures, and this was on the back of the Bank of Thailand (BoT)’s request for a debt rescheduling program.

NPLs on the Rise

The top 8 banks in the country loaned out 12.7 trillion baht as of end September 2020, up by 0.3 per cent QoQ and 5.9 per cent year-to-date. The aggregate reported NPLs of the eight banks totaled 504 billion baht, up by 0.5 per cent QoQ, 13.1 per cent YoY, a relatively modest QoQ rise, as clients in debt-rescheduling (mostly SME and retail) were not required to be marked as NPLs.

Bualuang Securities said in a note to clients that the end September NPLs/loans ratios of BAY, KBANK, and SCB rose slightly. In contrast, TISCO, KKP, TMB, and KTB posted QoQ declines in their NPLs/loans ratios. Aggregate Q3 2020 loan loss provisioning was 59.1 billion baht, up 25.3 per cent YoY. For the 9-months of 2020 provisioning totaled 182.2 billion baht, up 55.8 per cent YoY.

The broker said that conditional on fallout from COVID-19 continuing to ease in Q4 2020, there would be scope for most of the banks to pare back 2020 provisioning more than that is currently assumed.

A look at the NPLs data retrieved from BoT, one can see that the corporates NPL has increased by approximately 44 billion baht from the end of 2019 to Q2 in 2020. The total NPLs to total loans has risen to 3.08 per cent. The outstanding NPLs have increased gradually from 2018 but saw a significant jump during 2020. The corporate NPLs alone has increased by 5 per cent from Q1 to Q2 in 2020 and increased over 10.5 per cent compared to Q2 last year. This figure implies that the banks hold higher risks, resulting from the pandemic exposure, on business activity.

The key impacted sectors involves the banking sector and public utilities and transportation, wholesale and retail business, and manufacturing.

Recently, the debt moratorium that ended on October 22, 2020, and eligibility requirements to access other packages have come to be limited. This means that various Thai businesses will continue to face intense financial pressure with short-term liquidity, access to finance, and debt payment.

This tightening of the liquidity in the system has prompted many companies in Thailand to turn to the formal court process with 14 filings for rehabilitation under the central bankruptcy court to survive. This year, there are big firms such as Thai Airways International Plc and Nok Air Plc., were among those that filed a petition to seek court backed restructuring as the restructuring process gives corporations protection from immediate actions from lenders.

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Outstanding Corporate Bonds

Q2/2020’s increase in corporate

Slowing GDP means Lower Spending

The country’s gross domestic product (GDP) is set to shrink anywhere between 8-11 per cent during 2020, with even the BoT, which is one of the conservative estimators of the data, saying that the GDP could dip by as much as 8 per cent during the course of this year.

Key drivers of economic growth such as exports, tourism, and domestic consumption have all seen a sharp decline.

Thailand’s GDP growth is expected to recover slowly in the next three years. Commodity trading would view easing headwinds, but the divergence of global growth will cap recovery.

The problems are on many fronts and as many exporters would begin to know the impacts of the gradual recovery in exports. Public spending has been inadequate. The government is likely to launch a pro-cyclical fiscal plan in a downturn.

On public financing, the reality is not reaching expectations, with lags in various projects. The surge in spending by householders overseas implies that the purchasing power of middle-income earners remains steady.

Apart from this, the low farm income growth has delayed pay growth, and the dim job outlook slows low-income householders’ purchasing power. The government has proposed to help low-income earners but only give light reassurance.

All this comes as the tourism sector still remains a crucial growth engine for Thailand.

Credit Card

Over the next three years, credit card spending is forecasted to grow by 5.7-6.4% per annum. The key driver is the rise in consumer preference for online buying carried by a fast-growing e-commerce industry.

And various payment gateway technologies help facilitate credit card payments, such as the development of QR payments and having an online marketplace within banking applications. Credit cards are also increasingly used when traveling at home and abroad.

However, there are headwinds in increasing household debt (78.7% of GDP at end of Q2 2019), which will be a significant risk factor that could slow business growth. To approach massive household debt, the BoT has hardened lending rules for customer credit.

In contrast, financial institutions have assessed their lending plans for smaller borrowers. The BoT requires restricting borrowers from getting on unnecessary debt. These plans will impact in 2020 and push financial institutions to be more conservative with providing promotions to boost spending, such as giving 0%-interest loans or marketing credit to high-risk groups, especially those who have just started the labor force or too low- income earners.

Consequently, we expect to see credit card spending growth in the next period. This plan would cause banks to adapt their marketing strategies to maintain market share.

Auto Hire Purchase

Over the next three years, the auto hire-purchase sector is projected to expand by 6.6-7.0% per annum. The extension will be in order with overall national GDP growth. This growth will increase by more government spending to launch a new infrastructure, rising demand for commercial vehicles.

The release of new models will also increase vehicle sales, especially electric cars, over the next few years. However, there are risks to auto hire-purchase credits, stemming from two aspects. The first point is the high levels of household debt. The second point is the new limitations on customer loans proposed by the BoT in response to increasing fears of excessive household debt.

These factors should cause tighter lending criteria, especially for auto loans, and as a result, a decline in the offerings of balloon loans, and a more careful review of borrowers’ financial situation (e.g., total debt service ratio, particularly for low-income earners) instead of only requiring adequate security.

These factors will make financial institutions to be more conservative in allowing auto hire-purchase loans in the upcoming future. The boT will push for commercial banks to be more restricted in finance operations.

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