Fitch Ratings: Thai Bank and Corporate Outlooks to Weaken in Sharp Downturn

Stocks and Financial Services Press Releases Wednesday March 18, 2020 17:13
Bangkok--18 Mar--Fitch Ratings

Thai banks' asset quality and earningswill be significantly weaker in 2020 and Thai corporates face challengingcredit conditions because the country's economy will be one of the hardest hitby the coronavirus pandemic in the APAC region, Fitch Ratings analysts toldFitch Ratings (Thailand) Limited's webinar today.

Thailand's economy has a high reliance ontourism and exports, Jeremy Zook, Associate Director, Sovereign Ratings atFitch Ratings, commented. Fitch has just revised the sovereign rating Outlookto Stable from Positive in view of the rapidly evolving impact of the pandemicon the economy and lingering political uncertainty. We forecast growth to slowto 1.0% in 2020 mainly from slowing tourism, but also from a weaker globaleconomy and the drought. There are considerable downside risks to this forecastas more stringent quarantine measures are being imposed on travellers and arising number of domestic COVID-19 cases could dampen consumption. Despite thechallenging near-term growth outlook, in our view, Thailand's strong externaland public finances serve as a cushion against the current economic andfinancial shock, consistent with our 'BBB+' sovereign rating. For more details,see Fitch Revises Outlook on Thailand to Stable; Affirms at 'BBB+'.

Fitch's Director of Corporate Ratings,Obboon Thirachit, cautioned issuers and investors on the webinar that creditconditions for Thai corporates will be challenging in 2020 as downside risksincrease across portfolios and as some business-specific pressures weigh. Evenbefore the coronavirus, Thai corporates had already been affected by sloweconomic growth and subdued earnings. Further economic downturn stemming fromthe pandemic could delay earnings recovery, putting additional pressure on thecredit profiles of the issuers with high leverage. Fitch expects furthernegative rating actions to continue for the rest of 2020 because of the higherproportion of corporates with Negative Outlooks and increasing downside risk,although the majority of Thai corporates should remain on Stable Outlook inlight of their resilience and rating headroom.

In 2020, among corporate sectors, the oiland gas and petrochemical sectors are likely to be adversely affected by thecombination of demand shock from the coronavirus and the low oil price from oilsupply shock. Still, some of the issuers have mitigating strategies, resourcesor rating headroom that could place them at less immediate risk. For thebuilding material sector, the financial profiles of major cement producers arealready stretched following large M&A and high investment over the past fewyears. Slow demand recovery and oversupply situation could further delay thepace of deleveraging. Telecoms also face high capex need ahead of the 5Ginvestment cycle. Ongoing price competition and weak data monetisation willcontinue to put pressure on revenue and earnings growth.

Weaker economic conditions are affectingthe banking sector, said Parson Singha, Senior Director of FinancialInstitutions at Fitch Ratings Thailand. The magnitude of the impact depends onthe downturn's severity and duration, but we expect banks' asset quality andearnings to be significantly weaker in 2020 compared with prior years. SMEsmake up around one-third of bank lending and are particularly vulnerable toeconomic shocks. Furthermore, bank earnings, even before the outbreak, hadalready been under pressure due to low interest rates and slowing fee incomegrowth. The business outlook is weak, although the banking sector has soundbuffers that protect against downturns - for example, as of end-2019, thecommon equity Tier 1 ratio was 16.0% and the loan loss reserve coverage was145%. Domestic liquidity also remains relatively strong.

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