Bangkok Bank -- Moody's says Thailand's banking system outlook stable

Singapore, July 12, 2012 -- Moody's Investors Service says the outlook for Thailand's banking system over the next 12 to 18 months is stable.

"The stable outlook is underpinned by our view that reconstruction and inventory replenishment activities will generate the rebound as firms normalize production and the government implements programs introduced after last year's massive floods," says Karolyn Seet, a Moody's Assistant Vice President and Analyst.

Seet was speaking on the release of Moody's latest outlook on Thailand's banking system which is based on the central scenario that Thailand's economy will grow by 5.0% in 2012, and 5.6% in 2013, up from 0.1% for the whole of 2011.

Moody's expects annual loan growth of 5%-10% -- with the infrastructure and manufacturing sectors accounting for the bulk of the new loans -- versus 15% a year ago.

And Thai banks have the financial flexibility to withstand a substantial deterioration in asset quality, according to Moody's stress tests.

Under Moody's adverse scenario, in which non-performing loans (NPLs) reach an average of 10% throughout their loan books, the capital levels of all Moody's-rated banks will remain within a 7%-16% range.

"It would take our highly adverse scenario, with average NPLs of 20%, to cause Tier 1 ratios to erode to levels that would require some banks to raise capital by Basel II standards," says Seet.

The banking system's overall funding and liquidity profile is also stable, with liquid assets accounting for 30% of total assets, while customer deposits make up 75% of total funding, however the system's headline average loan-to-deposit ratio was relatively high, at 122% at end-2011.

Moody's does not expect any material change in the banks' dependence on the capital markets.

However, the significant foreign currency reserves accumulated at the central bank, which serve as a buffer against the risk of an external liquidity crisis, will ensure their continued access to US dollars in extreme conditions.

And despite the floods, the profitability of Thai banks will stay strong on the back of solid loan growth.

"We expect net interest margins to be somewhat under pressure owing to the competition for deposits, which may increase interest expenses," says Seet.

But Moody's notes that there is potential for an increase in loan rates in areas where demand is strongest, as well as for higher fee income.

Moody's rates 10 banks in Thailand, including eight commercial banks and two policy banks. The eight commercial banks accounted for approximately 89% of total banking system assets as at end-2011.

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Karolyn SeetAsst Vice President - Analyst Financial Institutions Group50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 SingaporeStephen Long MD - Financial Institutions Financial Institutions Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Investors Service Singapore Pte. Ltd.50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 Singapore JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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