revised its operating environment mid-point score for Thai banks to 'bbb', from
'bbb+', due to the significant pressures on the banking sector stemming from
the coronavirus pandemic. The ultimate trajectory and duration of the pandemic
remains unclear, but Fitch believes that risks to economic growth and business
activity are still skewed to the downside, as evident from the Bank of
Thailand's latest forecast for GDP to contract by 5.3% in 2020. Fitch's revised
score already incorporates such a possible contraction.
The coronavirus
pandemic comes at a relatively challenging point of the business cycle for Thai
banks. The banking sector's performance indicators had already been weakening
over the past few years due to muted economic conditions, sustained low
interest rates, and competitive forces that reduced growth in fee income. The
coronavirus outbreak has added considerably to these pressures, with the
recently announced shutdown intensifying a macroeconomic slowdown that started
in the later part of 2019 due to US-China trade tensions, a delayed budget and
drought. This will lead asset quality and earnings to be significantly worse
than our previous expectations.
Asset-quality
metrics had been on a negative trend for many years, and the industry now faces
a re-escalation of non-performing loan (NPL) growth due to the pandemic. The
repayment capacity of relatively weaker borrowers would be particularly
vulnerable to a prolonged economic downturn. In Thailand, this includes the SME
client segment, which accounts for around one-third of bank loans. Loan
impairments in SME clients had already been trending upwards before the start
of the coronavirus outbreak. The retail client segment will also be affected,
particularly non-mortgage consumer lending (around 16% of loans), if
unemployment increases.
The Bank of
Thailand has implemented several measures in response to the crisis. It has cut
its policy interest rate to record lows, relaxed regulatory requirements to
encourage debt restructurings in all client segments, and provided liquidity
support to financial markets. These initiatives will help prevent an immediate
jump in loan impairments, and will be important in restoring confidence to
domestic markets. However, they would be unable to fully reverse the
significant shocks caused by coronavirus-related disruptions to economic
activity, which should be felt by the banks this year and next.
This weakened
operating environment alongside deteriorating asset quality and earnings will
also lead to pressure on banks' standalone credit profiles and ratings,
including capitalisation through higher risk-weighted assets from credit
migration. Banks' credit profiles may be supported to some extent by their
respective loss-absorption buffers - the banking sector's Common Equity Tier 1
ratio at end-2019 was 16%, and loan-loss allowances coverage was 145%.
Furthermore, many banks' Issuer Default Ratings or National Long-Term Ratings
are driven by support from the sovereign or from higher-rated parents, rather
than from standalone factors.