Gauging the Potential in Thai Banking* Introduction Overview
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Financial Services Back on the investment radar: Gauging the potential in Thai banking* Introduction Overview The Thai banking sector is attracting increasing international • Economy set to rebound as confidence returns following interest as the market opens up to foreign investment and the return to democracy. the return to democracy helps to reinvigorate consumer • Banking sector recording steady growth. Strong confidence and demand. opportunities for the development of retail lending. Bad debt ratios have gradually declined and the balance • Foreign banks account for 12% of the market by assets and sheets of Thailand’s leading banks have strengthened 10% of lending by value.7 Strong presence in high-value considerably since the Asian financial crisis of 1997.1 niche segments including auto finance, mortgages and The moves to Basel II and IAS 39 are set to enhance credit cards. transparency and risk management within the sector, while accelerating the demand for foreign capital and expertise. • Organic entry strategies curtailed by licensing and branch opening restrictions. Reforms already in place include the ‘single presence’ rule, which by seeking to limit cross-ownership of the country’s • Acquisition of minority stakes in existing banks proving banks is leading to increased consolidation and the opening increasingly popular. Ceiling on foreign holdings set to be up of sizeable holdings for new investment. The Financial raised to 49%, though there are no firm plans to allow Sector Master Plan and forthcoming Financial Institution outright control. Business Act (2008), which will come into force in August • Demand for capital and foreign expertise is encouraging 2008, could ease restrictions on branch openings and the more domestic banks to seek foreign investment, especially size of foreign investment holdings. in the wake of the move to Basel II and IFRS. While an outright takeover of a Thai bank by a foreign • Curbs on cross-ownership and the divestment of state institution is prohibited at present, a number of international holdings could broaden the range of available investments. groups including ING,2 Scotiabank,3 GE Money4 and TPG Newbridge5 have all acquired significant strategic stakes in leading Thai banks since the beginning of 2007. Other groups are set to follow as the market opens up further and more stakes come up for sale. This flyer, produced by PricewaterhouseCoopers,6 looks at the prospects for market development in the Thai banking sector and how international groups can address them. 1 Bank of Thailand statistical update, 30.6.07. 2 ING media release, 28.12.07. 3 Scotiabank media release, 29.3.07. 4 GE Money media release, 2.7.07. 5 Bank Thai media release, 25.4.07. 6 ‘PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. 7 Bank of Thailand and PricewaterhouseCoopers analysis, 30.6.07. 2 Back on the investment radar: Gauging the potential in Thai banking • PricewaterhouseCoopers Investment environment Thailand’s return to democracy at the beginning of 2008 is set to provide fresh impetus for an already strongly growing economy. Thailand has emerged from the 1997 Asian financial crisis Uncertainty following the military coup in 2006 dampened in many ways stronger than before. GDP expanded by consumer and investor confidence. However, the return an average of more than 5% between 2003 and 2007.8 to democracy following the elections in December 2007 Exports increased by more than 80% during this period has ushered in a more stable outlook and looks set to (exports account for more than two-thirds of GDP9); buoyed reinvigorate consumer spending and foreign investment. by the rapid growth in electronics and vehicle production, Growth in GDP is expected to increase from 4.5% in 2007 along with traditional staples such as textiles and agriculture to 4.9% in 20088 (see Figure 1). (Thailand is the world’s largest exporter of rice9). The government’s attitude to inward investment is not always The price of exports has been affected by the continuing consistent. In particular, tighter rules on overseas ownership appreciation of the Thai baht against the US dollar (rising under the newly amended Foreign Business Act have raised 7% in 200710). In 2006, the Thai government introduced a investor concerns. However, banking is not covered by the 30% reserve requirement on some short-term foreign Act. Instead, foreign investment in the sector is subject to capital inflows to help curb currency speculation. The new specific legislation, which is being steadily liberalised. government has just announced an end to these capital controls, citing greater stability in economic conditions Figure 1 – Thailand: Key facts and its commitment to attracting more foreign investment, though the relaxation may spur further rises in the baht. Population 66 million As an export-led economy, Thailand is also vulnerable to a 2007 GDP per capita (market exchange rate) $3,126 downturn in demand in its main trading markets – the US and Japan. However, the impact could be partially offset by 2007 GDP per capita (purchasing power parity) $9,123 the growing diversification of Thai trade. This includes rapid 2007 GDP growth 4.5% increases in sales of Thai products to China. 2008 GDP growth (predicted) 4.9% 2009 GDP growth (predicted) 4.6% Source: Economist Intelligence Unit. 8 Economist Intelligence Unit, 13.11.07. 9 US Department of State Thailand profile, October 2007. 10 Reuters, 7.1.08. Back on the investment radar: Gauging the potential in Thai banking • PricewaterhouseCoopers 3 Market environment The Thai banking sector has considerable room for further growth. Assets and returns However, high levels of bad debt could act as a break on lending (see Figure 2), especially as Thai banks are now The total assets of Thailand’s 18 commercial banks required to hold loan-loss reserves covering all their increased by 41% between 2001 and 2007 to reach some non-performing loans (Figure 3 outlines loan loss reserves $268 billion.11 Return on equity (ROE) was 1.2% in 2007, to NPL ratios in the lead-up to implementation of the new having fallen from around 15% in 2005 as a result of the rules). The move to Basel II risk-based capital and IFRS IAS full adoption of IAS 39 loan loss provisioning. Having 39 loan impairment regulations could put further pressure accommodated this change, ROE is expected to climb on provisioning and could therefore increase the demand back towards the 2005 level. for foreign capital and risk management expertise. Further restrictions on lending and the need for possible Demand capital raising may result from exposure to subprime Commercial bank deposits increased by 31% to reach mortgage-related losses, though as elsewhere the full $198 billion and lending rose by 45% to reach $186 billion extent of the write-downs is largely unknown. between 2001 and 2007.11 Although the value of consumer loans rose by 81% during this period, retail lending only accounted for 31% of total loans in 2007.11 This proportion is relatively low in comparison to many other regional markets (Taiwan was 40%, for example12), suggesting that there is potential for further expansion. Key growth areas include auto finance, mortgages and credit cards, areas where foreign institutions have a strong market share (the number of credit cards in circulation increased by 38% from the beginning of 2005 to reach 12 million in June 2007, with foreign institutions accounting for more than 10% of accounts13). 11 Bank of Thailand statistics and PricewaterhouseCoopers analysis, 31.12.07. 12 Taiwan Supervisory Commission’s Banking Bureau, 2006 statistics. 13 Bank of Thailand statistical update, 30.12.07. 4 Back on the investment radar: Gauging the potential in Thai banking • PricewaterhouseCoopers Figure 2 – Non-performing loans in Thai commercial banks 18,000 18% 16,000 16% 14,000 14% 12,000 12% 10,000 10% 8,000 8% 6,000 6% 4,000 4% 2,000 2% 0 0% 2001 2002 2003 2004 2005 2006 2007 Amount % Total loans Source: Bank of Thailand. Figure 3 – Loan loss reserve as a proportion of NPL 160 BBLBBL BangkokBangkok Bank 140 KTBKTB KrungthaiKrungthai Bank KBANK Kasikorn Bank 120 KBANK Kasikorn Bank SCB Siam Commercial Bank 100 SCBTMB TMBSiam BankCommercial Bank 80 TMBBAY BankTMB Bankof Ayudhya 60 BAYSCIB SiamBank Cityof Ayudhya Bank 40 TBANK Thanachart Bank SCIB Siam City Bank 20 UOB United Overseas Bank TBANKSCBT StandarThanachartd Charter Bank ed Thailand 0 BBL KTB KBANK SCB TMB BAY SCIB TBANK UOB SCBT UOB United Overseas Bank As at 31December 2007 As at 31 December 2006 SCBT Standard Chartered Thailand Source: Company websites. Back on the investment radar: Gauging the potential in Thai banking • PricewaterhouseCoopers 5 Although commercial banking is already relatively The government has sought to improve efficiency and sophisticated in Thailand compared to other leading regional competition within the sector through the first phase of its markets such as Vietnam, there is still considerable room for Financial Sector Master Plan, launched in 2005. Banks can the development and marketing of more advanced derivative choose to be either commercial banks offering a full range of and treasury products. Bond trading is also relatively illiquid financial services (minimum capital of $125 million) or retail at present. banks serving mainly smaller companies and low-income consumers (minimum capital of $6.25 million). The Plan also Rationalisation includes the ‘single presence’ rule, which requires financial conglomerates to either merge their holdings into one entity The top five Thai banks account for more than 70% of and/or sell group companies. The deadline is the end of 2008. assets14 (Figure 4 lists the top 10 commercial banks by assets). As the rapid fall away in asset values in the bottom These measures are likely to accelerate the rationalisation half of Figure 4 highlights, the remainder of the market is and competitive reorientation of the sector into a few relatively fragmented.