Fitch predicts angst over banking rules

Higher expenses from regulatory costs and IT investment will erode Thai banks’ profitability over the next few years, says Fitch Ratings Thailand.

The Thai banking industry is preparing to comply with additional international requirements under the new Basel lll framework, International Accounting standard 39 and International Financial Reporting Standard 9, which are expected to be implemented in 2018-19, said Parson Singha, Fitch Ratings Thailand’s senior director for financial institution. Additional IT investment is another key expense, Mr Singha said. Higher regulatory expenses will strengthen the fundamentals of the sector, while IT investment will provide greater business opportunities in the longer-term, he said.

Fitch is maintaining its negative outlook for the Thai banking sector this year, as it has over the past two years.

The negative outlook is based on protracted growth challenges contributing to increased credit risks and worsening profitability.

The credit rating agency also predicts non-performing loans (NPLs) of the banking sector will peak around the new year period in line with economic circumstances, he said.

Fitch forecasts Thailand’s gross domestic product growth for 2017 will be in the range of 3-3.5%, compared with last year’s 3.2%.

The agency projects total loan growth of the banking industry will be around 5-8% this year, improving from 5% last year. Loan growth is expected to improve in the second half, supported by the government’s infrastructure investment plan.

Fitch will keep the outlook of the individual credit ratings of all 13 banks under its coverage as stable this year.

The NPL ratio of the banking sector under the central bank’s definition was around 3% on average last year, but the ratio under Fitch’s definition was a little bit higher.

The industry is expected to be able to ride through higher bad loans given strong capital and reserve buffers.

In addition, new NPLs have been slowing down in accordance with picking up economic momentum, and stronger risk management.

“Fitch will maintain stable a outlook for each bank. It will take more time to upgrade to a positive outlook,” Mr Parson said.

Kobsidthi Silpachai, Kasikornbank’s head of capital markets research, said the baht could appreciate further if the US Congress votes against the American Health Care Act, which will reflect the president’s inability to deliver his policies into practices.

“If the market fears that he will not be able to implement measures such as tax cuts and infrastructure investment, capital flight this year might not be high as expected and some funds may flow back to emerging markets,” he said.

According to the bank’s estimation, the baht would not strengthen to more than 34.5 to the dollar even in the worst case scenario.