Low interest rates, subdued credit growth prospects and tough competition in home markets have served to fuel greater appetite for overseas M&A. Fitch believes that this will continue in 2020. Banks are also seeking to service the growing international operations of their domestic clients. The factors driving foreign expansion, while particularly marked in Asia's more developed economies, are also evident in some emerging Asian economies, including Thailand.
Bangkok Bank Public Company Limited (BBB+/Stable) agreed to acquire an 89% stake in Indonesia-based PT Bank Permata Tbk (AAA(idn)/Rating Watch Negative) in December 2019, and it emerged in January 2020 that Thailand's KASIKORNBANK Public Company Limited (BBB+/Stable) was in talks to buy a 35% stake in Myanmar's Ayeyarwaddy Farmers Development Bank. The Siam Commercial Bank Public Company Limited (BBB+/Stable) also revealed in January that it was seeking regulatory approval to upgrade its Myanmar representative office into a bank subsidiary.
We expect that other large Thai banks will examine the potential for international expansion, among other strategies to support growth. In general, the sector enjoys a reasonable capital position, which could support inorganic growth overseas. However, the scale of possible acquisitions may be limited by capital bases; we would expect few to match the scale of the Permata deal.
Thai Banking Sector CET1 Ratio
Significant offshore expansion, particularly in lower-rated jurisdictions, could reduce banks' capital buffers and indicate an increase in risk appetite, which may affect their Viability Ratings. The capacity of the acquiring banks to handle the management challenges associated with overseas M&A will be an important factor in our assessment of the effect of such deals on their ratings. In general, we would view banks from developed economies in Asia as better positioned for overseas expansion in terms of their financial profiles and expertise.
Thai Large and Mid-Sized Banks' Loans to Foreign Entities ( % of total lending, as of Jun 2019)
Bangkok Bank is unusual in this regard among Thai banks, having significant international experience. The bank has operated in Indonesia for many years, and also has subsidiaries in Malaysia and China. Other Thai banks have much more limited international operations. We would expect those that pursue overseas expansion to focus their efforts within their own sub-region, in south-east Asia, as part of an effort to limit the potential risks associated with operating in unfamiliar environments.
Expansion into more challenging operating environments may create additional risks for Thai banks, as well as for other financial institutions in Asia that adopt this approach. Against a background of low interest rates and relatively stable regional economic growth, such risks may not appear immediately obvious. However, risks may crystallise if the environment becomes less benign. Consequently, the appropriateness of loss-absorption buffers in the face of mounting risk appetite will be a further factor in our assessment of the potential impact of overseas M&A on banks' ratings.