Banks well placed to cope with economic slump: Bank of Thailand

[webfact]

Banks well placed to cope with economic slump: BOT
The Nation

BANGKOK: -- Despite the economic slowdown, Thai commercial banks continue to maintain a strong position because of their high provisions, the Bank of Thailand said yesterday, expressing no concern over credit expansion.

Salinee Wangtal, BOT assistant governor for the Supervision Group, said commercial banks had gone through stress tests, which assessed their financial status and capability.

Even in the worst-case scenario, if the Thai economy does not expand for one to two years, commercial banks' credit remains strong and they can cope with the country's economic slowdown, she said.

"Thai commercial banks remain strong and supervision of debt quality remains at a very good level. Based on the test, if the economy is sluggish for one to two years, they [commercial banks] can handle it. However, NPL [non-performing loans] may rise at some level. Presently, commercial banks are setting aside sufficient provision. Excess provision is 157 per cent. Commercial banks continue making profits despite the economic slowdown," she said.

At the end of March 2014, commercial banks' credit rose 9.8 per cent, compared to 11.34 per cent at the end of last year's 2013.

NPL stayed steady at 2.3 per cent due to commercial banks' close monitoring and immediate assistance for borrowers. Small-and medium-sized enterprises' (SMEs) loan growth in March remained satisfactory at 11.7 per cent, compared to last year's 14.66 per cent. SME NPLs was 3.6 per cent while SM was 2.1 per cent.

Large-sized enterprise loans in March stood at 6.9 per cent, compared to 6.68 per cent at the end of 2013. Some private organisations issued debentures for borrowings.

Retail loans in March expanded 10.7 per cent, compared to a 12.89-per-cent growth in 2013. Hire purchase in March rose 2.5 per cent, compared to last year's over 30-per-cent increase in the same period. Personal loans grew about 7 per cent, compared to more than 20 per cent last year. Retail NPLs stayed steady at 2.4 per cent due partly to a policy-rate cut that lessened interest burden. Retail loans' SM was 3.4 per cent.


-- The Nation 2014-04-30

[mmh8]

Of course the bank is well positioned, they can just print more money

[chiang mai]

I believe the article refers to commercial banks rather than the Bank of Thailand.

[Cylon]

The banks might be well placed, but business is not, this political bullshit is Thailands downfall economically.

[chiang mai]

The political wrangling is going to dent the economy but in no way will it destroy it, at some point things will settle down and when they do, watch out, the economy and the currency will simply take off.

[JohnP1752]

No doubt the economy probably will take off when this political situation is over. The question is when will it be finished and will it get worse before it gets better.

I read that the Bangkok condo sales market has dropped 34% YOY, not sure if this is impacting prices yet or if this will just be a short term blimp.

However if the political situation continues to drag on or even get worse one could expect NPLs and the Baht to continue going downhill in the short term, maybe even resulting in a hard landing.

[SheungWan]

The banks might be well placed, but business is not, this political bullshit is Thailands downfall economically.

You might want to tell Volkswagen who have announced that they are going to build an auto production facility in Thailand.

[Costas2008]

Wait till the loan defaults start growing and then we will see how well equipped the banks are.

[SheungWan]

Wait till the loan defaults start growing and then we will see how well equipped the banks are.

According to the article, stress tests have shown that the banks are equipped. For any indication otherwise one would expect a lurch downwards in the baht going forward. The main concern now is that the issue has been flagged and puts more squeeze on the continuing political uncertainty. One recent positive is that the caretaker government was blocked from raiding bank reserves to pay off the farmers rice scheme.

[Pib]

It's always a sunny financial day in Thailand until the thunderstorm comes out of nowhere and rains on the financial parade.

[laocowboy2]

Wait till the loan defaults start growing and then we will see how well equipped the banks are.

According to the article, stress tests have shown that the banks are equipped. For any indication otherwise one would expect a lurch downwards in the baht going forward. The main concern now is that the issue has been flagged and puts more squeeze on the continuing political uncertainty. One recent positive is that the caretaker government was blocked from raiding bank reserves to pay off the farmers rice scheme.

The BoT was concerned about the economic fallout of the political mess as long ago as the end of Q2 2013. From that point on banks were being 'encouraged' to build up their loan loss reserves - and to tighten up their credit underwriting standards. The banks have also been taking a long and hard look at their existing portfolios and seeking to exit relationships where serious financial weakness looks likely - and looking at customer cash flows rather than just collateral. Unless things get a lot worse in the economy, the banks should be able to contain adverse trends in asset quality.

Problem over? Not quite. It is not bad loans that will hurt but rather slow loan growth (falling consumer confidence means less borrowing, SMEs delaying CAPEX means less borrowing) and lower fee income (less imports means less fees, fewer new loans mean lower loan fees etc.). This will mean slower growth (if any) in gross income while operating expenses will continue to rise. So operating profit will be squeezed. And it is operating profit that has to provide the source of additions to loan loss reserves.

So credit quality crisis this year (or next) no - but lousy profitability trends.

[fletchsmile]

Wait till the loan defaults start growing and then we will see how well equipped the banks are.

According to the article, stress tests have shown that the banks are equipped. For any indication otherwise one would expect a lurch downwards in the baht going forward. The main concern now is that the issue has been flagged and puts more squeeze on the continuing political uncertainty. One recent positive is that the caretaker government was blocked from raiding bank reserves to pay off the farmers rice scheme.

The BoT was concerned about the economic fallout of the political mess as long ago as the end of Q2 2013. From that point on banks were being 'encouraged' to build up their loan loss reserves - and to tighten up their credit underwriting standards. The banks have also been taking a long and hard look at their existing portfolios and seeking to exit relationships where serious financial weakness looks likely - and looking at customer cash flows rather than just collateral. Unless things get a lot worse in the economy, the banks should be able to contain adverse trends in asset quality.

Problem over? Not quite. It is not bad loans that will hurt but rather slow loan growth (falling consumer confidence means less borrowing, SMEs delaying CAPEX means less borrowing) and lower fee income (less imports means less fees, fewer new loans mean lower loan fees etc.). This will mean slower growth (if any) in gross income while operating expenses will continue to rise. So operating profit will be squeezed. And it is operating profit that has to provide the source of additions to loan loss reserves.

So credit quality crisis this year (or next) no - but lousy profitability trends.

Just to add to some of the points above. The stress tests by the BOT in 2H 2014 assumed a weakening of the THB and no GDP growth for 2 years.

Many banks also do their own additional stress tests, with even more stringent conditions, i.e even greater weakening in THB and negative GDP.

The last part in the post above about operating profit being squeezed being more important than bad loans is not quite accurate in a zero growth environment when talking about Thai banks ability to cope or capital adequacy. The key is non-performing loans/ loan loss levels.

Zero growth without any significant deterioration in credit quality or increase in loan losses will actually improve the capital adequacy ratios of banks. This is because most banks are profitable (all major Thai commercial banks have positive PPOP) and will continue to be so even with zero loan growth as long as loans don't deteriorate significantly. This means that for their various capital adequacy ratios (capital / risk weighted assets), capital increases as profits increase (CET1 capital) but RWA will remain flat. Hence for zero or very slow growth the numerator increases but the denominator doesn't and the CARs improve. Even if profits are squeezed/reduced the numerator still increases as long as they are still profitable, no matter how small the increase. It is only when a loss is made the numerator decreases. For losses to happen, the majority of commercial banks in Thailand would require the bad loans to hurt.

Hence bad loans are the key rather than squeezed/reduced profits in terms of capital adequacy and financial stability. The stress tests the banks did showed this to be the key.

Additionally slow growth has improved liquidity in the sector, as banks have been able to raise deposits easily but found it harder to make assets. So LDRs improved.

Another point to note and expand on the original article is that last year Thai banks made countercyclical provisions. This was BOT's way to implement the countercyclical buffers required in Basel III (although there are some technical nuances between buffers and provisions). Many banks in the west - particularly in UK and US are behind the Thais in countercyclical buffers implementation not even due for a year or two yet! Additionally with effect from 1 January 2013, Thailand implemented Basel III's new minimum capital ratio levels: CET1 of 4.5%, Tier 1 6%, Total CAR 8.5% (0.5% above the global norm). In the US and UK they are building up to the 4.5% CET1 MCR level over coming years as the minimum. Thailand already did it from day 1 (1 Jan 2013 where Basel III starts to be phased in until 2019) as they didn't suffer from the devastation wreaked on western banks by the GFC, and could jump straight to the end point on that aspect.

So all in all quite an accurate article from the Nation for once. Thai banks are well placed...

Cheers

Fletch

Edited April 30, 2014 by fletchsmile

[Naam]

Thai banks are well placed...

blasphemy!

[Senechal]

Has there ever been a central bank in history expressing a public lack of confidence in the viability of the banking system? He whole thing is a confidence game.