Thai banks are not as sound as they claim

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BANGKOK — Covid ambulance sirens are blaring in Bangkok as the kingdom continues to grapple with record daily caseloads.

But it’s the alarm bells ringing around Thai banks that are potentially the biggest cause for alarm in one of Asia’s worst-hit pandemic and slowest-to-recover economies.

Rating agency S&P Global recently downgraded the creditworthiness of major Thai lenders Siam Commercial Bank, Kasikorn Bank and Krungthai Bank, citing rising “systemic risk” and a “fragile” economic recovery.

In a stark assessment that raised questions about official transparency and data quality, S&P said it saw “no immediate solution” to the “structural problems” that are rampant and that there is “a growing divergence in the economic reality and reported asset quality ratios”.

This assessment rests largely, but not entirely, on Thailand’s decimated tourism industry, which before the pandemic contributed up to 20% to gross domestic product (GDP) when related ancillary industries and services are counted. .

Despite high hopes last year for a rebound from the high season, arrivals in the fourth quarter were only 3% of the number of travelers who visited the kingdom during the same quarter of 2019, the last quarter of the Thailand’s seemingly limitless tourism boom. .

The market and investors now clearly believe that Thailand’s economic prospects are highly dependent on a recovery in tourism, as evidenced by the recent swings in the baht as authorities more recently announced an easing or tightening of entry requirements. some tourists.

But these swings may also reflect new market concerns about Thailand’s deteriorating financial transparency since Covid-19, including non-performing loans (NPLs) reported by banks and their related exposure to sunk tourism assets.

A lone tourist walks past deckchairs along an almost empty Patong beach in Phuket on October 1, 2020. Photo: AFP / Lillian Suwanrumpha

Official data shows that only 3% of Thai bank loans are exposed to hotels, resorts and restaurants – a figure that may be significantly underestimated given the pre-pandemic boom in hotel and resort construction to accommodate the rapid increase in foreign arrivals, once but no longer driven by ever-increasing numbers of Chinese tourists.

Foreign tourist arrivals jumped from 24.8 million in 2014 to 40 million in 2019, a dizzying increase in numbers that has seen massive new investment in hotels and other tourism infrastructure almost nationwide, making it difficult an accurate tally of the pandemic’s devastation to assets – particularly as many independent foreign analysts have been hesitant to visit the kingdom due to ever-changing entry restrictions.

S&P says Thai banks’ “indirect exposure to tourism-related activities is likely to be much higher” than the official figure of 3%. Indeed, a ghost town walk through any Thai resort town – from Hua Hin in the beach south to Chiang Mai in the mountainous north – reveals seemingly immeasurable devastation.

Regulatory forbearance and a relaxation of loan classification standards, according to S&P, have delayed and will delay the “recognition and crystallization” of underlying bad debts. Data from the Bank of Thailand (BoT) implausibly shows that the system’s NPLs have held steady at 3% during the pandemic, a figure that many observers consider to be an underestimate.

This 3% figure allows Thai banks to claim exceptionally high capital adequacy ratios of 20%, which at 1.6 times system-wide NPLs is much higher than comparable markets. and signals sufficient provisions to markets to absorb a potential increase in bad debts.

But the 3% figure has been massaged by debt moratorium programs which officially show that 14% of bank loans now face “relief measures”, which S&P notes as “very high compared to others emerging markets” and a large part of which he expects will eventually “migrate to full debt restructuring”.

In a statement, the BoT said in response to the downgrades that Thai banks remain “resilient with high levels of capital buffer to withstand future risks and uncertainties” and that a “continued recovery of the Thai economy will help improve borrowers’ incomes and debt service”. as well as the quality of bank loans.

He said the number of debtors in “relief” fell from 30% at the height of the Covid lockdowns in July 2020 to 14% currently. An S&P analyst involved in the research told Asia Times that the BoT did not contact the rating agency directly after the big banks’ downgrades were announced.

Yet there are many indications that Thailand is postponing the timing of the financial reckoning for Covid-hit tourism assets that have little to no chance of recovery or survival, especially as authorities give new voice to the industry’s old upscaling plans. to “elite” travelers and away from the mass market embodied by low-budget Chinese tour groups.

Chinese tourists wearing face masks while visiting the Grand Palace in Bangkok on January 29, 2020. Photo: AFP / Lillian Suwanrumpha

If so, it means that many hotels, inns and markets built specifically for the low-end Chinese market will likely never resurrect, and the bridging loans that keep their lights on are sunk funds. It’s also unclear whether China will soon send its nationals overseas in light of its “zero tolerance” Covid policy and talk of “dual circulation” domestic growth that could deter overseas spending. ‘foreign.

Thai government policy has so far envisioned a rapid return to the future. A state subsidy scheme known as ‘We Travel Together’, which pays up to 50% of Thai travellers’ hotel bills, gave the industry a much-needed tax injection last year, but was only able to boost occupancy rates to 14%, underscoring how foreign tourists are to the wider industry.

Analysts say the state-funded program is unsustainable even in the short term and because most Thais have opted to stay in high-end hotels and resorts they wouldn’t have and could not normally afford, the grants have helped large hotel companies like the Central Group more than the smaller tourism operators who need the help the most.

A big financial unknown, however, is exactly how the decline in tourism has impacted high and rising household debt levels, which were already among the highest in the region at 80% of GDP before Covid-19 and have since officially increased to what S&P considers an “unsustainable” 90%.

This figure is undoubtedly much higher when informal loans, including those from loan sharks and other underworld lenders who often charge usurious rates with harsh repayment terms, are fully taken into account.

Compounding this lack of transparency, there are questions about the amount of bad credit pumped by specialized financial institutions such as savings cooperatives beyond the BoT’s regulatory jurisdiction.

Countless millions of middle-class Thais have lost their well-paying jobs in hospitality and tourism due to the Covid crisis, precisely the segment on which banks have in recent years extended mortgages and personal loans for expensive consumer purchases such as automobiles and computers.

According to some financial analysts, this is at the heart of the ripple effect of growing systemic risk in the Thai banking sector. Meanwhile, political considerations complicate and will complicate an effective and timely unwinding of bad debts that could allow problems to deepen and deepen in the banking system, particularly as U.S. interest rates rise in coming months, according to the same analysts.

This includes the royally owned and recently decommissioned Siam Commercial Bank, which S&P says is “more exposed” to tourism than others. Other analysts say its lending practices are relatively “aggressive” among the kingdom’s three big banks, the other two being Kasikorn Bank and Bangkok Bank.

Siam Commercial Bank is more exposed to tourism-related loans than other Thai banks. Image: Twitter

This can be seen in the fact that 17% of Siam Commercial Bank’s loans are now subject to so-called “comprehensive debt restructuring”, making it the first bank to adopt the change in loan classification. emergency response in the event of a pandemic. Bangkok Bank, the kingdom’s largest lender, does not publicly disclose the percentage of its loans that are in “relief”.

Thailand’s big banks, linked to the palace and politically, are too big to fail and the kingdom’s rich stockpile of US$245 billion in foreign exchange reserves provides a buffer the country did not have when the crisis hit. financial year of 1997-98, when the BoT mismanaged the national reserves are literally at zero and the NPLs soared to 48%.

No one is predicting such a financial collapse, even amid 1997-like worries about the kingdom’s underlying financial health and transparency. But without a quick and strong rebound in new tourist arrivals, the Covid ambulance sirens blaring in Bangkok could portend a health emergency turned financial.

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