The banks’ financial statements for the third quarter of this year still reflect adjustments to protect their operational performance, despite benefiting from the increase in interest rates, supporting the net interest margin (NIM) of the Thai banking system within the range of 3.14-3.18%, the centre said.
Even though the rising domestic interest rates should boost interest income and NIM — one measure of the net return on the bank’s earning assets, which include investment securities, loans, and leases — of the Thai banking system in the third quarter of this year, the cost of deposit mobilisation is also increasing, the centre said.
Gaining from policy rate hike
KResearch added that the recent upward adjustments in policy interest rates and lending rates of commercial banks would help boost the NIM of the Thai banking system to be within the range of 3.14-3.18% in the third quarter of this year, up from 3.09% in the second quarter. The returns from lending are expected to benefit from the increasing proportion of high-yielding loan portfolios compared to the overall loan portfolio.
However, the cost of deposit mobilisation in the third quarter of of this year might increase due to the continuously rising proportion of fixed deposits.
KResearch has forecast that the proportion of fixed deposits in the third quarter of this year will be in the range of 29.0-29.4% of total deposits, compared to the overall proportion of 24.0% in the second quarter.
Meanwhile, the deposit costs of the Thai banking system in the third quarter of this year may increase to 0.80-0.88% compared to 0.71% in the second quarter.
This follows several commercial banks adjusting their interest rates on savings products and continuous special fixed deposit campaigns.
Loans are still growing at a moderate rate, while the recent increase in yields of government bonds during the quarter might impact the mark-to-market valuation of securities in the commercial banks’ investment portfolios.
As the recovery in the Thai economy is not yet widespread, commercial banks are likely to be cautious in assessing credit risks for new lending, the centre said.
Slowing loan growth
Combined with the gradual repayment of existing loans during the quarter, KResearch estimates loan growth of the Thai banking system to be in the low range of 0.1-0.3% year-on-year (YoY) in the third quarter of this year, slowing down from 0.5% YoY growth in the second quarter of this year.
The increase in investments in commercial bank debt securities is expected to impact the mark-to-market valuation of assets in the commercial banks’ investment portfolios. The adjustment is estimated to be around 30-45 basis points compared to the level at the end of the second quarter of this year.
It is anticipated that investments in debt securities will constitute approximately 11.2-11.4% of the total assets of the Thai banking system in the third quarter of this year, up from 10.9% in the second quarter of this year.
When combined with other factors, this might slow down the non-interest income in the third quarter of this year, particularly in fee-based categories such as credit card fees, ATM/debit card services, and agent fees, KResearch said.
Most commercial banks are proactively restructuring their debts and managing low-quality debt to handle non-performing loans (NPLs) in a situation where interest rates remain relatively high, and the uncertain economic outlook continues to challenge commercial banks’ asset quality management.
Due to the significant increase in credit risk and the number of accounts receiving assistance from commercial banks and non-bank financial institutions, which increased to 2.31 million accounts by the end of July of this year from 2.21 million accounts by the end of June of this year, commercial banks continue to assess the ability to repay debts, especially of small businesses and households. They are also assisting clients in debt restructuring, coupled with efforts to manage NPLs in order to ensure they are at acceptable levels so as to reduce pressure on loan provisioning costs.
Stable NPL ratio
Taking these factors into account, KResearch estimates that the NPL ratio of the commercial banking system (Thai banking system plus foreign bank branches) might remain stable or fall slightly to around 2.63-2.67% of total loans in the third quarter of this year, compared to 2.67% in the second quarter.
The credit-cost ratio (the cost of provisioning for credit losses) might be in the range of 1.25-1.29% in the third quarter of this year, slightly lower than 1.30% in the second quarter of this year, but still higher than during normal circumstances.
For the remaining period of this year, commercial banks are expected to continue adjusting to protect their operational performance, although there is a chance that the NIM might increase in the fourth quarter of 2023.
KResearch estimates the overall net profit of the Thai banking system for the first nine months of this year to be around 186-191 billion baht. Interest income is expected to continue growing and remain a significant driver of performance in the last quarter of this year due to the potential upward adjustment of NIM after several commercial banks increased their interest rates in September to early October 2023, following the monetary policy rate of the central bank set in the meeting on September 27.
However, amid the uncertain economic outlook both domestically and internationally, commercial banks still face the challenge of adapting, KResearch said. In its assessment, commercial banks will continue their efforts to manage NPL issues, while preparing to accommodate the Responsible Lending criteria, which will be enforced starting early 2024, in the last quarter of this year.
Additionally, they will remain flexible to meet the potential increase in demand due to government economic stimulus measures and compete with other financial products. Banks might also continue special fixed deposit campaigns to enhance their liquidity.
The banks would be competing with other financial products among options for depositors later in the year.