Thai Bank's Loan Bombshell: Worse To Come?

[george]

Thai bank's loan bombshell: worse to come?

Financial system left more vulnerable

BANGKOK: -- The morning before Krung Thai Bank reported its first-half earnings last month, Thailand's stock exchange cited the government-controlled bank as a model of disclosure and shareholders' rights.

Then the bank, Thailand's second-largest, dropped a bombshell that sent its stock tumbling by more than one-third: Krung Thai disclosed that the central bank had compelled it to reclassify more than $1 billion of loans as nonperforming - despite the fact that payments were still being made on them. A total of 12 percent of its loans, up from 8 percent, would be considered nonperforming.

The central bank governor later singled out Krung Thai for lax lending standards, saying that it had financed several major projects of such dubious quality that their owners probably would not be able to repay the money. "They aggressively pursued loans without thinking a whole lot about what they were doing," said Andrew Stotz, head of research at Macquarie Securities in Bangkok.

The shift in classification laid bare an underlying concern: that government pressure for Krung Thai and other state-controlled financial institutions to increase lending may have resulted in less stringent credit controls at Krung Thai, leaving the entire financial system more vulnerable to a wave of defaults should the economy suddenly slow.

The news has left some analysts concerned about the fiscal policies of Prime Minister Thaksin Shinawatra.

Many say Krung Thai's revelation is fresh evidence that "Thaksinomics," the unique blend of policies that has helped rev up Thailand's economy to a 7 percent annual growth rate, depends too much on pushing state-owned financial institutions like Krung Thai to finance domestic spending.

Pushed by Thaksin's government, Krung Thai has been lending so much money in the past few years that it now accounts for 17 percent of all commercial bank lending in Thailand, up from 12 percent in 2001.

Krung Thai officials did not return phone calls seeking comment, but in statements to the stock exchange, the bank said it remained sound and had already made provisions against the newly classified bad loans.

Pridiyathorn Devakula, the central bank governor, on Aug. 14 called a news conference to reaffirm Krung Thai's health and denied that the bank would have to raise capital.

Analysts agree that the bank is sound. However deep the dismay over Krung Thai's loan portfolio, the bank is by no means on the verge of collapse, they say. On the contrary, it has set aside plenty of cash and ultimately has the backing of the government as well, as Fitch Ratings noted when it reaffirmed its rating on the bank this month.

Analysts at Fitch and elsewhere call the disclosures at Krung Thai an encouraging move by the central bank to make it harder for corporate deadbeats to avoid paying old loans by taking out new ones, and Krung Thai's bad-debt ratio remains better than the national average of 13 percent.

Still, the same analysts say the fact that the central bank considers $1 billion of Krung Thai loans risky enough to be considered nonperforming even while they are still being repaid could be a harbinger of bad loans in the future, as rising global interest rates and a slowing global economy put pressure on corporate borrowers.

"It indicates there are problems," said Vincent Milton, who is the managing director of Fitch Ratings in Bangkok. "You're likely to see continuing underperformance in terms of profitability and asset quality."

Central bank officials declined to comment on what had spurred them to so drastic a reclassification.

After the central bank's inspection was completed in June, it told Krung Thai that it considered many of its customers' projects doubtful.

On the list were 14 large projects that included several property developments. Even though the loans were still being paid on time, the central bank told Krung Thai to classify them as nonperforming and make provisions in case their owners defaulted.

The World Bank expressed concern about the pace of lending by Krung Thai and other state-owned commercial banks in a report in April.

-- The New York Times 2004-08-25

[Phil Conners]

Great news. Will be buying a house in a year or two when the prices are down to 25% of current levels

[ovenman]

The shift in classification laid bare an underlying concern: that government pressure for Krung Thai and other state-controlled financial institutions to increase lending may have resulted in less stringent credit controls at Krung Thai, leaving the entire financial system more vulnerable to a wave of defaults should the economy suddenly slow.

I don't see how this can honestly be a surprise to anybody.

Does anybody else recall the difficulties Mr. Big encountered trying to appoint a finance minister after Thai Rak Thai first came to power in 2001? The post was politely declined by several Thai bank bigwigs until he finally settled on The Shill, marketing genius Somkid Jatrusripitak.

At first I thought that the Thai banks would be champing at the bit to get the new government's financial programs rolling. This would allow the banks to unload their bad debt to the government's new proposed asset management corporation. I ultimately realized this wasn't the case. In conjunction with taking away a bank's portfolio of NPL's, Mr. Big wanted the banks to start lending again. Ostensibly, this borrowing would be done by the same ol' deadbeats, who else is there to be borrowing large sums of money but the likes of TPI, et al?

[Nam Kao]

Baht 55 to 1$ coming

[siam]

90 BAHT TO THE £1

[Sphere]

That's hardly surprising at all. I have an account at one of the top banks here and applied at my local branch this week for a Bank Reference. Yesterday, I went there to collect it and found that the certificate was issued in the wrong name. The bank officer insisted that I had filled-in the application form incorrectly. (Do I not know my own name?).

While I was waiting, the person talking to me mumbled something incoherently and disappeared. I assumed he went to get me a corrected version of the certificate. After waiting about 15 mins, I asked the guy on the next counter, who curtly informed me that his colleague had left for lunch and would be back in 40 mins. What kind of service person leaves a customer waiting at the counter and goes for lunch?

Eventually, I was told to come back 2 days later for a corrected certificate. Since it was anyway all my fault (supposedly entering someone elses name in the application instead of my own), they obviously did not want to speed up the corrected document!

The banking system here leaves a lot to be desired. Making nice interior decor with catchy concept names and serving coffee or playing loud DJ music inside the branches is no substitute for real customer service.

[astral]

90 BAHT TO THE £1

We reached that level in 1997!!

This is why I always say,

Never bring more money into Thailand than you are prepared to walk away from

It should be noted that Krung Thai Bank is the government's own bank!!

[kwiz117]

Great news. Will be buying a house in a year or two when the prices are down to 25% of current levels

Yes. me too..wait..prices will go down by 30-40% in next couple of years. All those new housing projects are funded by these few Thai Banks and now doing all they can to sell them. Interestingly, many Thai people known to me are also waiting until they hit the ball.. I am wondering if everyone think like this, how these guys are going to sell them.

I also know a project funded by Krungthai Bank way outside Bangkok without having a clue about what this company is going to do with it. They have given 250million by taking the Land in that remote village, factory building (which was over estimated and pocketed out by the investor) and junk machines (2nd hand imported from UK and Germany). The real value of this is in the range of 150million at the start of this project and now may be 75 million. Unbelievable!!

In my opinion, these Investment analysts working in these banks do not have proper knowledge to do this job. Thailand included the 'Comparative Figures' as mandatory to it's financial statements few years back. Also you can not get any ###### thing by reading any Audited Account here.. This is a heaven for any foreign company to open a branch.

Another intesting thing here is, No Foreigner alowed to work in the Accounting field. May be that is to stop getting these info out of this country or not to do any proper accounting so that they can cover up all these things easily.

[Flummoxed]

Bugger I just changed a load of Pounds into Baht. Wish I'd've waited now.

[bkkharry]

Hey don't you know, you give them 6% under the table, and you get your loan. TIT

[bkkharry]

Do you really think the banks will discount the property they may end up holding if they do forclose? I get the impression that the owners of property will not sell unless they get what they want, and that they would not offer to discount any property to get rid of it. Just curious.

[ovenman]

Do you really think the banks will discount the property they may end up holding if they do forclose?

Good question. Traditionally that's been a problem in Thailand, i.e. an owner or a bank will hold a property for years rather than take a hit on a wildly overinflated value.

[tuktukmike]

Some good replies here as i have the same problem.

I found an empty factory that suited the purpose that i needed and through my lawyer found the owner.

The owner spoke to my laywer and said he wanted 150million baht for the property at which time my lawyer hung up the phone, about a week later i had a call telling me that this person could not sell the land or factory as he had not made any payments for about 2 years.

Now the good part, i contacted the thai bank who repossed the factory and was later informed that the previous owner had taken credits of 30million baht but that if i was really serious obout buying they would let me have it for 20million baht.

As the real value after having a good thia friend check for me was worth only 5million tops i declined their offer, i have heard a lot of things like this when dealing with thai banks and i cant understand why they think i would pay off someone else's debt.

[RooBoy]

Maybe the next Argentina just around the corner??

[ovenman]

Now the good part, i contacted the thai bank who repossed the factory and was later informed that the previous owner had taken credits of 30million baht but that if i was really serious obout buying they would let me have it for 20million baht.

I would not be surprised to learn that the owner actually owes the bank in the neighborhood of 15 to 20 million baht and the bank told you 30 million to make it sound like they were offering you the deal of a lifetime. I would be more surprised to learn that the bank was offering you an initial discount of any sort.

You could probably return in five years time and find the same scenario played out: the owner with no clear title to the property would still be trying to stroke you for 150 million baht, the bank would be willing to let it go for 20 million and the property would actually be worth about 3 million after another five years of neglect.