Increased loan demand driving credit growth in Thailand's banking sector

The banking sector experienced mixed results in 2017. Although bank loans and asset quality benefitted from the country’s ongoing economic recovery, with operating profits rising as a result, high provisioning costs and preparations for the new accounting standards that take effect in 2020 saw net profits decline for many larger commercial banks. The sector is resilient, well capitalised and liquid, but non-performing loans (NPLs) remain high, particularly for smaller businesses.

Similarly, consumer debt is also on the rise, with stakeholders reporting that the country’s economic recovery has been limited to larger corporates, as the rate of loan defaults of small and medium-sized enterprises (SMEs) and home buyers has increased. Corporate lending was stagnant as businesses turned to alternative financing channels, while banks’ fee-based income came under pressure after the launch of a new national online payment system.

Despite these challenges, the sector is set for steady growth in 2018. NPLs are expected to have peaked in 2017, and an anticipated surge in public spending on infrastructure will further support economic recovery, loan growth and bank profitability. Although financial technology (fintech) presents new challenges for traditional lenders, the sector is expected to benefit from the wider adoption of fintech tools and platforms, with mobile banking and blockchain technology in particular offering significant growth opportunities (see analysis).


As of July 2018 there were 15 domestic commercial banks, four foreign bank subsidiaries, 11 full branch foreign banks, two finance companies and three credit foncier firms operating under the supervision of the central bank, the Bank of Thailand (BOT). Additionally, there were eight government-owned specialised financial institutions (SFIs), including the Bank for Agriculture and Agricultural Cooperatives, the Export-Import Bank of Thailand, the Government Housing Bank, the Government Savings Bank, the Small Industry Credit Guarantee Corporation, the Secondary Mortgage Corporation, the Small and Medium Enterprise Development Bank of Thailand, and the Islamic Bank of Thailand. SFIs play a vital role in the Thai financial system, accounting for 25% of total deposits and 29% of total household debt as of 2016. In 2014 the Ministry of Finance (MoF) announced plans to transfer supervisory and inspection responsibilities for SFIs to the BOT. The BOT’s SFI Supervision and Examination Department has overseen the segment since mid-2016.

The four largest commercial banks are Bangkok Bank, Kasikornbank (KB ank), Siam Commercial Bank (SCB) and Krung Thai Bank (KTB). In December 2017 KB ank was the largest bank in Thailand in terms of market capitalisation with $16.5bn, followed by SCB with $16.1bn, Bangkok Bank with $11.9bn, and KTB with $8.4bn, according to Singapore-based brokerage firm DBS Vickers Securities.


Financial intermediation has recorded consistent growth in recent years, recovering from a 0.8% contraction in 2008 to grow by 11.2% in 2009, 5.9% in 2010, 6.1% in 2011 and 15.5% in 2012. Though growth has moderated in the following years, intermediation remains robust, with a rise of 12.5% in 2013, 7.5% in 2014, 8.4% in 2015 and 6.5% in 2016, according to the BOT.

The National Economic and Social Development Board (NESDB) reported that financial intermediation increased by 4.6% in the first quarter of 2017 and by 5.1% in the second quarter, supported by household credit growth, including real estate loans and rising household consumption. It then grew by 4.6% in the third quarter of 2017 before moderating to 4.2% in the following quarter, as a result of a slowdown in the commercial banking sector, with the total volume of loans and deposits failing to offset declining net interest incomes at commercial banks. Overall, financial intermediation recorded an increase of 4.6% over the course of 2017.

According to the BOT, bank assets have also risen steadily in recent years, with total assets climbing from BT15.5trn ($448.7bn) in May 2013 to BT16.4trn ($474.7bn) in May 2014, BT17trn ($492.1bn) in May 2015 and BT17.7trn ($512.3bn) in the same month of 2016. In the following 12 months total assets rose further to BT17.9trn ($518.1bn) and to BT18.8trn ($544.2bn) in May 2018. Capital funding also increased, from BT2.4trn ($69.5bn) in May 2017 to BT2.5trn ($72.4bn) the following year, while the loan-to-deposit ratio moderated from 96.14% to 95.96% over the same period.

Heavy Hitters

Bangkok Bank is Thailand’s leading corporate lender as of the end of 2017, recording BT3.1trn ($89.7bn) of assets, a BT2trn ($57.9bn) loan portfolio and BT2.3trn ($66.6bn) of deposits. The bank’s total interest income rose from BT102.4bn ($2.96bn) in 2016 to BT105.5bn ($3.05bn), and it was the only one of the big four banks to record net profit growth in 2017, which increased from BT32bn ($926m) in 2016 to BT33bn ($955m).

Bangkok Bank’s large exposure to corporate loans – with large corporates comprising 42% of its loan portfolio and SME loans accounting for 30% – will likely make it one of the biggest beneficiaries of an anticipated investment up cycle in 2018, supported by public infrastructure investment and resurgent private sector investment. An agreement with life insurance company AIA, reached in October 2017, is also expected to boost the bank’s revenues, with bancassurance fees accounting for between 4% and 5% of its income from fees.

Total assets for KB ank rose from BT2.8trn ($81bn) in 2016 to BT2.9trn ($83.9bn) in 2017, while net interest income increased from BT89.7bn ($2.6bn) to BT94.2bn ($2.7bn). Non-interest income declined, however, dropping from BT63.7bn ($1.84bn) to BT62.7bn ($1.81bn) over the same period, as did net profits, which fell from BT40.2bn ($1.2bn) to BT34.3bn ($992.9m). Due to the commercial bank’s marginal bottom-line growth at the end of 2017, significant development over the short term is unlikely, according to DBS Vickers Securities; however, the brokerage firm noted that KB ank maintains a competitive advantage as the leader in digital banking and in the area of non-interest income generation.

Meanwhile, KTB’s total assets rose from BT2.6trn ($75.3bn) in 2016 to BT2.8trn ($81bn) in 2017, and total loans grew from BT1.8trn ($52.1bn) to BT1.9trn ($55bn). Over the same period, deposits increased from BT2trn ($57.9bn) to BT2.1trn ($60.8bn), while non-interest income was up slightly, from BT31.46bn ($910.6m) to BT31.47bn ($910.9m). In contrast, net interest income fell from BT75.5bn ($2.2bn) to BT73.9trn ($2.1bn). Net profits also dropped in 2017 to BT21.3bn ($616.6m) from BT30bn ($868.4m) in 2016. While KTB is a proxy for government investment, given that it is a state-owned bank licensed under the MoF, it is nonetheless expected to be at risk of higher provisioning expenses as it prepares for the implementation of the new International Financial Reporting Standard 9 (IFRS 9).

Rounding out the big four, SCB’s total assets rose from BT2.66trn ($77bn) at end-2016 to reach BT2.73trn ($79bn) one year later, with customer loans, which comprise 75.1% of the bank’s assets, standing at BT2.1trn ($60.8bn). Over the same period, net interest income increased from BT80.2bn ($2.3bn) to BT82.9bn ($2.4bn), while net fee and service income hiked from BT31.7bn ($917.6m) to BT32.1bn ($929.2m). Net profits, however, dropped from BT41.2bn ($1.2bn) to BT37.9bn ($1.1bn). According to DBS Vickers Securities, the bank’s transformation projects and staff cost adjustments drove its cost-to-income ratio higher, while its non-interest income has yet to improve as a result of the broader, unfavourable economic environment.

Loan Growth

Lending experienced marked improvement in 2017, with the BOT reporting that the overall growth rate rose from 2% in 2016 to reach 4.4%. This was supported by an acceleration in SME and automobile lending late in the year, which boosted private sector loan growth from 4.4% in 2016 to 4.7% by the end of 2017.

Corporate lending, which accounted for 67% of total loans, expanded by 3.6% in 2017. This was driven entirely by SME loan growth, with the BOT reporting that large corporate lending was stagnant as firms moved to repay loans via alternative sources, such as equity and debt securities.

Nevertheless, some companies did turn to banks for financial support, namely electronics manufacturers and firms in the energy and transport sectors. As of December 2017 manufacturing accounted for the largest share of corporate lending with 18.2%, followed by commerce (15.2%), financial businesses (9.1%), public utilities (7.6%), services (7%), real estate (5.3%), construction (1.9%) and others (2.7%).

SME loans, excluding financial businesses, rose by 5.7% in 2017, supported mainly by lending to the commerce and manufacturing sectors, as well as high-end real estate companies.

Home loans are the largest consumer loan category, accounting for 16.7% of total lending as of December 2017, followed by auto loans (7.6%), personal loans (7.6%) and credit card debt (1.9%), according to the BOT. Consumer lending rose by 6.1% in 2017, supported by 8.4% growth in automobile lending, which the bank reports is consistent with improved car sales following the end of the five-year lock-in period for the government’s first-car buyer’s scheme that ended in 2017. In 2017 personal loans rose by 5.7%, although housing loan and credit card growth both declined by 5.5% and 3.4%, respectively.

Credit Contraction

The BOT attributed the credit card contraction in 2017 to Standard Chartered Bank’s ongoing global restructuring. In December 2016 the bank moved to sell its Thai retail banking unit to local bank TISCO for BT5.5bn ($159.2m). High household debt and slow economic recovery weighed on Standard Chartered’s operations, making future consolidation more likely for smaller players, with the bank reporting that its retail banking business struggled to achieve targeted returns. Plakorn Wanglee, CEO of the bank’s Thai operations, said the bank will instead focus on corporate and commercial lending.

The deal increased TISCO’s consolidated assets by 15%, with a total of BT41.6bn ($1.2bn) of assets and BT36.1bn ($1bn) of liabilities transferred to the bank in the form of personal lending, mortgages, retail banking, wealth management and individual deposit businesses. Meanwhile, Standard Chartered’s credit card business went to TISCO affiliate, All-Ways. Assets included BT7bn ($203m) of personal loans, BT5bn ($145m) of business loans, BT25bn ($724m) of mortgages, six Standard Chartered branches, 300,000 retail customers, 100,000 high-net worth clients and BT4bn ($116m) of credit card business.

In March 2018 TISCO and All-Ways announced they had signed a deal to sell their personal loan and credit card business to the Bangkok branch of Citibank. TISCO claimed that the deal was part of a strategy to expand its secured loan business, focusing its activities on mortgage and core banking business, including auto loans. Citibank reported that the deal offers it a chance to scale its business domestically, aligning with its plan to boost inorganic growth via asset acquisition. In 2017 TISCO’s net profits increased by 21.7% to hit BT6.1bn ($176.6m), while its interest and non-interest income rose by 6.7% and 17.8%, respectively.

Household Debt

As one of the top credit card issuers in Asia, Citibank’s acquisition could offer considerable growth opportunities, although Standard Chartered’s exit from retail lending is indicative of the challenges facing lenders as a result of high household debt. Thailand has one of the highest levels of household debt in the region, with the BOT reporting that the ratio of household debt to GDP stood at 77.5% as of December 2017. In April 2018 a survey published by the University of the Thai Chamber of Commerce (UTCC) reported that 96% of low-income households claimed to be in debt. According to the UTCC, the average debt per household for individuals earning less than BT15,000 ($434) per month rose by almost 5% year-on-year to BT137,988 ($3994), the highest amount in 10 years. Furthermore, 85.4% of survey respondents had defaulted on debt repayments in 2017, largely owing to lower incomes, higher expenses, and high debt burdens and interest rates. According to local media, up to 34% of low-income households’ debt was held by the informal sector, which charges interest rates of up to 20% each month.

Although the household debt-to-GDP ratio improved to 78.3%% in the third quarter of 2017, from a high of 80.8% in December 2015 and 79% in December 2016, a highly leveraged consumer base has weighed on asset quality in recent years. The gross NPL ratio rose from 2.8% in 2016 to 2.9% in 2017, standing at BT429bn ($12.4bn), according to the BOT. The ratio of special mention loans, which are loans overdue by more than one month but less than three, fell from 2.63% to 2.55% over the same period to BT375bn ($10.9bn).

Although NPLs climbed at a slower pace in 2017 than in 2016, NPL ratios in the SME and consumer lending sectors remained relatively high. The NPL ratio of SMEs hiked from 4.35% in the fourth quarter of 2016 to 4.63% in the third quarter of 2017, before moderating to 4.37% in the following quarter. Over the same period, the NPL ratio of consumer loans increased from 2.71% to 2.74%, before easing to 2.68%, though large corporates’ NPL ratio rose from 1.47% to 1.69%, and then once more to 1.75%. At the moment there is a lot of refinancing and restructuring of debt as a result of NLPs.

SME Segment

In February 2018 global ratings agency Standard & Poor’s (S&P) reported that the banking sector remains challenged by ongoing NPL vulnerabilities. In particular, it noted that large, export-related companies appear to be benefitting more from Thailand’s economic pickup than SMEs. Retail-oriented SMEs, which generally only serve the local economy, missed out on gains in electronics exports, while structural constraints, such as an ageing population that weighs on domestic consumption and flat agriculture price growth, are exacerbating the situation.

According to S&P, the SME segment remains the biggest obstacle to asset quality for Thai banks, particularly because weaknesses in the segment could spill into consumer lending. The NPL ratio of housing loans increased from 2.9% at the end of 2016 to 3.3% in the following year, and S&P reported that small business owners also tend to borrow from financial institutions in their personal capacity, with a subdued business climate posing the risk of negatively affecting both consumer and business loans.

Citing uneven improvement, with the special mention loans of SMEs increasing from 2.5% in the fourth quarter of 2016 to 2.8% one year later, S&P argued that the effects of the country’s resurgent economic growth have not fully reached all segments. The agency noted that performing restructured loans accounted for some 2.5% of total loans among the Thai banks rated by the agency.

Nonetheless, it forecast that improved sentiment and business confidence will gradually feed into the retail and SME segments in 2018, with government measures to support SMEs in accessing credit, including soft loans, credit guarantees and income tax deductions, expected to further benefit small business owners and also moderate special mention loans and NPLs. “The government considers SME development a core priority,” Nitid Manoonporn, former president of the Thai Credit Guarantee Corporation, told OBG. “The MoF has asked banks to lower loan interest rates for SMEs, but lenders are reticent due to the high rate of NPLs.”

New Standards

With NPLs remaining a concern, the BOT reported that provisioning costs increased by BT72.7bn ($2.1bn) to hit BT602bn ($17.4bn) in 2017, while the ratio of actual to regulatory loan loss provision stood at 171.9%.

Higher provisioning costs were also driven by preparations for IFRS 9, which is set to come into effect in January 2020. Under the new standards, banking institutions must make provisions for future potential losses, against the current practice of providing after losses have been incurred. The standards also introduce a new category of underperforming loans, in addition to performing loans and NPLs, with loans downgraded to underperforming once their credit risk has increased significantly, acting similarly to special mention loans.

KPMG argued that the changes will require banks and other stakeholders to review the contractual terms of investments, document business models for managing investments, review credit risk management processes and data availability, and assess whether credit risk management systems can instantaneously track changes in credit risks.

The new standards will bring the Thai banking system further in line with international best practice, building upon 20 years of post-Asian financial crisis reforms that have left it well positioned for sustainable growth (see analysis).

Ongoing efforts to expand the activities of the National Credit Bureau (NCB) could also help bolster the sector. According to the bureau, 61% of 14.3m personal loan applications were rejected in the third quarter of 2017 and 50m NCB transactions were expected in 2018, which should further improve banks’ asset quality. In May 2018 the NESDB announced that the NCB will partner with SFIs to establish a company responsible for analysing the financial data of SMEs as part of a broader national information system, with the new company expected to facilitate access to credit for SMEs. With provisioning costs rising, however, the BOT reported that banks’ return on assets fell from 1.13% in 2016 to 1.05% in 2017, while the ratio of net interest income to average interest-earning assets was flat at 2.8%.


According to S&P, 2018 is set to be a turning point for the sector, with macroeconomic expansion, stabilising asset quality and an anticipated increase in public investment likely to end the credit down cycle. Banks will experience gains in earnings as provisioning costs drop and loan growth recovers, with rising infrastructure investment expected to support broader industry expansion.

While net interest margins will likely remain unchanged in 2018, increased loan demand could bring about top-line growth. The new online payment system could impact fee income in the short term, however, it is expected to offer significant long-term cost benefits, with DBS Vickers Securities citing that increased economic activities should also support a rise in fee incomes. As a result, earnings are forecast to expand by 7% in 2018, against the 5% contraction in 2017, which would indicate a new period of resilient, profitable and sustainable growth in banking.

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The Report: Thailand 2018

Banking chapter from The Report: Thailand 2018

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