Bad debts in Thailand spread from retail to small companies

[BANGKOK] Hopes that bad debts in the Thai financial system may have peaked this year are fading as more small companies and medium-sized enterprises default on their bank loans, hit by slowing domestic consumption and falling exports, particularly to China.

The rising tide of non performing loans (NPLs) is spurring analysts to downgrade their outlook for Thai banks. Both the sector and individual banks such as Bangkok Bank and Siam Commercial Bank have been downgraded at least twice this year as souring loans and a stuttering economy eat into their profits.

Thailand's central bank has already twice lowered its forecast for the country's economic growth, and is expected to cut its estimate for the third time in September. "NPLs will continue to rise in the second half and they should peak in late Q3 or early Q4. We hope the government can do better to stimulate the economy next year, but we are quite worried about that," said Weerapat Wonk-Urai, an analyst at Bangkok-based CIMB Securities. "The drought and declines in agricultural products are adding more pressure to the economy because that affected loan demand in the SME sector... Small and medium companies will be the main contributor for rising NPLs in the second half," Mr Weerapat said.

According to StarMine data, analysts have cut their forecasts for major Thai banks' earnings by as much as 6 per cent in the past 14 days after second quarter earnings were announced.

Equally worrying is the increase in special mention loans (SMLs), loans that have been delinquent for one to three months but are yet to be declared non performing.

SMLs, which jumped 13 per cent in the January-to-March period from the previous quarter after single-digit growth in previous quarters, could turn into bad debt and force banks to set aside more provisions, hurting profits.

Krung Thai Bank and Siam Commercial Bank are more vulnerable given their exposure to Thailand's biggest steel maker Sahaviriya Steel Industries, whose borrowings are currently classified as SMLs.

SMLs at the top four banks - Bangkok Bank, KTB, SCB and Kasikornbank - rose to 2.9 per cent of total gross loans in the second quarter from 2.6 per cent over the same period, Fitch Ratings said.

Reflecting investor concerns about asset quality, the bank shares index has been the worst performing sub-index in Bangkok so far this year.

Souring debts from SMEs, which make up more than a third of Kasikornbank's loan portfolio, have pushed up the bank's overall bad loans by 13 per cent so far this year.

Adisorn Mungparnchon, an analyst at Bangkok-based Phillip Securities said the fall in bank shares however offers good bargains for investors ready to weather the storm. "The second half is normally a high season for loan growth, and we expect banks should perform better with lower provisions after setting aside substantial reserves in the first half," he said.

REUTERS