Persistent weakness seen in the Thai economy as a result of the coronavirus (COVID-19) pandemic since early 2020 has substantially hurt the profitability of commercial banks during 2Q20. The highly volatile economic cycle at this time has pressured income of commercial banks' core businesses and in turn driven up their expected credit losses to a higher-than-normal level.
KResearch assesses that overall loans within the Thai commercial banking system may grow at least 6.0 percent YoY in 2Q20, agaist the 4.1 percent pace reported for 1Q20, led by business loans. However, accelerated loan growth during 2Q20 may not cause the yields on loans to increase as seen during normal conditions because of two factors: 1) commercial banks trimmed their MLR/MRR/MOR during 2Q20; and, 2) new large business loans and SME loans may carry lower interest rates than an average portfolio of commercial banks.
Due to the impact of the sluggish economy on the debt servicing abiliy of many borrower segments, we at KResearch expect that the NPL ratio of commercial banks may increase to 3.30-3.40 percent of total loans in 2Q20, over the 3.05 percent reported for 1Q20. As a result, close attention must be paid to NPLs in the SME and retail loan portfolios.
KResearch assesses that all commercial banks will likely use the the economic fallout in 2020 (due to the severe impact of COVID-19 and the fact that it may take many years for the Thai economy to return to normalcy) as an important assumption for their business plans during the remainder of 2020 and through to 2021. In every economic crisis in the past, commericial banks always experienced an asset quality problem as a laggard factor. This means that NPLs in the commercial banking system will likely rise over the next few years even if the economy may improve in 2021, thus causing commercial banks to set aside higher-than-normal provision. Such a condition may inevitable hurt the profits of commercial banks over the coming quarters.