Thai financial sector sees shaky recovery in Q4 but foundations remain in place

With the outbreak of the 2nd wave of Covid-19 virus well under way across the western hemisphere, fears are that the approaching winters could cripple the slight economic development seen over the past few months.

Many countries are now seeing a record number of new cases prompting fears that the economy could further crippled if more lockdowns are introduced.

The economy globally and domestically in Thailand has seen a severe impact from the initial outbreak earlier this year and to make matters worse the debt moratorium that was announced by the Bank of Thailand expired on October 21, 2020.

This expiration of the debt moratorium is expected to have a chilling impact on the consumer loans and the small & medium sized businesses. This has prompted many to fear that the financial sector could have problems that first appeared during the financial crisis of 1997/1998.

There is no doubt that COVID-19 has made 2020 a terrible year for almost every business, including banks. Its impact can be seen in a sharp over-year contraction in financial performance during the country’s lockdown period in Q2 2020, vast numbers of borrowers entering into financial-aid programs, and a higher number of NPLs. Meanwhile, uncertainty still looms large, making it hard to claim that the worst will soon be over.

The worst quarterly performance for Thai banks since 2011

According to Bank of Thailand (BOT) data, domestically-registered banks reported that net profits contracted 13.6 per cent year-on-year (YoY) in 1st half of 2020. The Q2 2020 alone showed net profits of 29.7 billion baht, a fall of 47 per cent YoY and marking the worst quarterly performance since the 4th quarter of 2011. 

This picture reflected proactive provisioning expenses, in response to potential asset deterioration from economic contraction, while core revenue – including interest and fee income – was on the decline, particularly during Q2 2020.

At the same time, non-performing loans (NPLs) have been trending upward, reaching 3.23 per cent of total loans in Q2 2020, compared to 3.14 per cent at year-end 2019. Although NPL figures may seem lower than expected in light of the current economic stagnation, it is mainly due to the BOT’s flexible loan classification that allows restructured loans under financial-aid programs to be classified as normal loans, resulting in a lower provisioning burden. 

At the end of Q3 2020, these loans under financial-aid programs totaled around 4 trillion baht, equivalent to around 28.5 per cent of Thai banks’ total loans.

Also in Q3 2020, an unaudited financial results of 9 Thai banks were also on the weak note, with 45.2 per cent YoY and 2.7 per cent quarter-on-quarter (QoQ) drops in net profits. The NPL ratio continued to rise, albeit at a marginal pace amidst implementation of financial-aid measures.

Uncertainty still looms large, in both the short and medium terms

For Q4 2020, the banks’ organic performance will likely remain weak, as the revenue outlook has not yet recovered, and the high season of expenses is in the pipeline. Loan-loss provisioning expenses will likely remain high, despite a possible drop from the banks’ proactive provisioning earlier.

On top of that, the underlying economy itself is expected to witness a fragile recovery, pending development and subsequent impacts from additional waves of the COVID-19 pandemic, the domestic political situation, and global trade tensions.


Another notable development to monitor is the expiration of debt holiday campaigns for business borrowers in October 2020. Although, according to the BOT, 60 per cent of debt holiday customers should be able to repay their debts as per the original contracts, and banks will continue to provide financial aid for the remaining customers on a case-by-case basis, the picture could change in line with changes in the overall economic circumstances.


In addition to near-term events, Thai banks will also need to brace for such medium-term challenges as post-pandemic behavior changes of consumers, heightened competition, as well as upcoming regulations, especially those related to consumer protection and market conduct. 

All of these factors will make it harder for banks to maintain their business and profitability, going forward.

A different story from the 1997 crisis: Thai Banks’ current health are much stronger.

The current circumstances are dissimilar to those of the Tum Yam Kung (also called the Asian Financial) crisis that this region saw in 1997. At that time, fragility was concentrated in the banking sector and financial system, derived from, for instance, the pegged exchange rate, asset/liability mismatching, high concentration in credit portfolio, and lack of checks and balances in credit underwriting. 

However, the business and household sectors at that time remained quite healthy, with sound earnings and low household debt.

In the present crisis, weakness has already been seen in the fragile balance sheets of the private sector, both business and household, amid high debts and faltering business competitiveness. The COVID-19 pandemic and country lockdowns paralyzed global logistics and cross-border transport, thereby triggering a sudden loss in revenue and a collapse in business operations. This eventually led to firms’ inability to maintain employment.

On the contrary, Thai banks’ capital and liquidity position remains sound, with Thai banks’ total capital ratio reaching 19.18 per cent at present, compared to only 9.1 per cent before the 1997 crisis. Liquidity is also ample with the loan to deposit ratio being 91.4 per cent at present, against a figure in excess of 100 per cent before the 1997 crisis, implying that banks are now better able to handle unexpected liquidity needs from the private sector.

Cross-Country Comparison of Capital and Liquidity Ratios

Apart from this, Thai banks’ capital position, namely Core Equity Tier1 featuring the most solid capital resources to absorb any loss, is found to be stronger than that of developed countries, like the US, UK and EU nations. Likewise, Liquidity Coverage Ratio (LCR) of Thai banks has stayed above that of the aforementioned countries.

All of this is evidence of the Thai banking system’s ability to stand against any economic or asset quality headwinds in the foreseeable future. Depositor and other stakeholders can therefore feel confident that their wealth parked at banks will remain safe and sound.

However, if the current turmoil drags on, collaborative efforts are a must for survival.

It is worth noting that Thai banks’ strong financial health alone does not mean that the country will cruise through the current crisis relatively unscathed. As long as new uncertainties keep popping up, any economic recovery will be further delayed. All stakeholders must therefore serve in their roles and collaborate more with each other for a faster response.

Authorities need to consider the balance between reopening the country to shore up business revenues vs. risking any reemergence of COVID-19. Additional fiscal stimulus is certainly needed, but the tougher call is how to make it effective in practice.


Commercial banks need to continue providing liquidity support and financial-aid programs for customers who are still struggling. As the major problem at present is customers’ excessively high credit risk, collaboration with authorities is crucial in providing tailored and effective solutions, thereby allowing more liquidity injection into the business and household sectors.

Continued prudence is also essential for banks, as Tier-1 capital ratios should be maintained at above 10-12 per cent to ensure uninterrupted credit extension when the economy is truly poised for recovery.

Business and household sectors must stay conservative with their liquidity, investments and spending, amid challenges in revenue generation and job security.

Most importantly, all parties should remember to stay on a high hygienic guard, and be prepared for any further unpleasant developments in the COVID-19 pandemic.

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