Despite better profitability at Thai commercial banks in 1H08 due to accelerating growth from major revenue sources, i.e., net interest income, and also higher net profit, the financial health and Thai commercial bank business may be hampered by a number of risks in 2H08. For instance, risks stemming from the sluggish domestic economy as a result of political uncertainty and the slowing global economy caused largely by the US sub-prime mortgage market crisis. These risks are expected to affect demand for business loans (both corporate and SME loans), as well as retail loans, causing them to be on the same fate. The growth of core performing loans in the Thai commercial banks is likely to slowdown, with a projected growth of 9.0-10.0 percent at the end of 2008, against 16.5 percent at the end of June 2008.
Moreover, these economic risks may force Thai commercial banks to pay more significance to monitoring the problem of deteriorating debt quality. Meanwhile, Thai commercial banks may be forced to realize losses or set aside additional allowances for impairment of their investments in US financial instruments that are facing financial problems in 2H08.
The interest spreads of Thai commercial banks will also likely subside in 2H08, amid possible deceleration in loans adverse to the rising cost of interest expense following hikes in fixed deposit rates in June 2008 and commercial banks' competition to launch special deposit products giving higher interest rates than usual during July-August. Therefore, KResearch expects that the interest rate margins at Thai commercial banks during 2H08 will likely fall lower from 1H08 by 0.05-0.10 percent, to 3.59-3.64 percent given the fact that Thai commercial banks may not raise their interest rates over the remainder of this year.
However, although the future business and financial health of Thai commercial banks in 2H08 may not be as bright as it should be, Thai commercial banks are facing tough situations like other sectors in the Thai economic system. At present, Thai commercial banks still exhibit high financial stability under the tight supervision of the BoT. The overall capital to risk asset ratio at the end of July 2008 was at 15.10 percent (this is information on domestically listed commercial banks, in which Tier-1 capital represents 11.61 percent to risk assets). The loan loss provisioning ratio was higher than BoT's minimum by 1.2 fold in June 2008 and the NPL ratio decreased from the previous records considerably (against the over 40 percent of total loans during the economic crisis in 1997), while risk management is more efficient than in the past. Therefore, all of these factors have helped ensure the strength of Thai commercial banks and their ability to withstand this unfavorable environment.
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