The high level of profits posted by the Thai banking sector last year generated a good deal of controversy, with some commentators suggesting interest rates were too high.
In 2023, the banking industry posted a 17.8% increase in net interest income (NII) to 727 billion baht, up from 617 billion in 2022, with the five largest banks by total assets posting a higher net interest margin, leading to the uptick in NII.
Commercial banks’ profitability this year could face several risks, especially from a deluge of non-performing loans (NPLs) for auto purchases.
AUTO LOAN REJECTIONS
Caution regarding NPLs is expected to keep the loan rejection rate high in the auto sector this year, currently at 30-50% of all loan applications.
The strict criteria aims to reduce the number of car seizures, say industry analysts.
While some of the seizures may be electric vehicles (EVs), most buyers of EVs have sufficient purchasing power to afford this segment of car, said Krisda Utamote, president of the Electric Vehicle Association of Thailand.
EV sales are expected to post continued growth this year, following a 600% year-on-year increase to 76,000 registered EVs in 2023, he said. Forecasts suggest EV sales will reach 100,000 this year.
Instead, NPLs in the auto sector are expected for owners of vehicles with internal combustion engines (ICE), particularly pickups, said Mr Krisda.
Sales of pure pickups plunged 31.8% year-on-year in 2023, attributed to banks setting stricter loan criteria as household debt spiked in the country, according to the Federation of Thai Industries (FTI).
The loan rejection rate is expected to remain elevated this year as banks are wary of expanding car seizures, said FTI vice-chairman Surapong Paisitpatanapong, who is also spokesman for the its Automotive Industry Club.
Last year, between 200,000 to 300,000 cars were seized, while Mr Surapong said 180,000 vehicles seized per year is normal.
Borrowers have weaker finances, straining their ability to pay their instalments, he said.
“The problem usually occurs in the ICE category, especially for pickups,” said Mr Surapong.
The rate of NPLs in the auto sector is 12%, he said.
NPLs also affect auto lending businesses. They posted a combined loss of 1-2 billion baht last year, said Mr Surapong, citing media reports.
These companies and other financial institutions are working to improve the loan approval process by increasing the down payment requirement, allowing borrowers to pay smaller instalments, which should reduce the risk of default, he said.
Failure to pay instalments for three months is considered an NPL.
State efforts to combat the high level of household debt are necessary, but should be in tandem with a plan to improve the economy by strengthening people’s purchasing power, Mr Surapong said.
BAD DEBT
Bundit Anantamongkol, chief executive of Bangkok Commercial Asset Management Plc (BAM), forecasts banking NPLs will increase this year as the Thai economy remains sluggish despite the recovery of the tourism sector.
As a result, consumer purchasing power will dip, weakening the debt repayment ability of borrowers, he said.
BAM, the country’s largest asset management company (AMC), expects banks to continue to sell bad debt to AMCs this year.
Sales of bad assets by the banking industry in 2023 tallied around 170 billion baht.
The company is targeting bad asset purchases worth 70 billion baht this year.
However, banking NPLs should not increase significantly this year as a result of continued loan portfolio management and debtor assistance through debt restructuring, Mr Bundit said.
The Bank of Thailand’s long-term debt restructuring measures should allow financial institutions to better manage distressed debt, he said.
Financial institutions would be more prudent in terms of new lending under the central bank’s responsible lending guidelines in an effort to prevent new NPLs.
A REAL CONCERN
Kanjana Chockpisansin, head of research, banking and the financial sector at Kasikorn Research Center (K-Research), said the NPL ratio, which measures the level of a bank’s credit risk and the quality of outstanding loans, is likely to grow from 2.68% in 2023 to 2.85% this year despite measures by commercial banks to address the growing level of bad debt.
NPLs calculated by the think tank cover the outstanding loans of 28 commercial banks, comprising 17 registered as banks in Thailand, and 11 branches of foreign banks.
Total outstanding NPLs exceed 500 billion baht, she said.
“NPLs are a lagging indicator of the economy, meaning after the economy recovers for a certain period of time, bad debts will begin to improve,” Ms Kanjana told the Bangkok Post.
“The economy is recovering slowly and GDP growth could be downgraded this year, with NPLs likely to rise. Uncertainties both in Thailand and abroad are likely to affect the capacities of businesses and individual debtors to service their debt obligations, with unsecured debts in particular at risk of becoming NPLs.”
While the NPL ratio is below 3%, unlike during the pandemic, the level is concerning industry players and analysts, she said.
“Banks have measures in place started during the pandemic to assist their clients, but many are due to expire, which is worrisome,” said Ms Kanjana.
Information released by the National Credit Bureau indicated since last year’s fourth quarter, the day past due has begun to apply to more loans, both for car and housing credit, compared with recent years.
Day past due is a term used by banks to indicate the number of days that have elapsed since the due date of a particular credit account.
Under the central bank’s responsible lending guidelines, from April 2024 creditors must assist low-income debtors with severe persistent debts, categorised as an interest payment higher than the principal payment over the past five years, while allowing the debtor to have sufficient disposable income to meet their living requirements.
“Because of this measure, we are hopeful the NPL ratio this year will not significantly increase from the 2023 level,” she said.
LOWER PROFITABILITY
National Credit Bureau data revealed NPLs of its member financial institutions tallied 1.05 trillion baht in 2023, representing a 6.6% increase over 2022.
The NPL ratio increased to 7.7% in 2023 from 7.4% in 2022.
The value of auto loan NPLs last year totalled 230 billion baht, a 28% increase year-on-year, while the value of personal loan NPLs reached 260 billion, a 12% gain.
From 2005 to 2023, the banking sector largely reported high net profits year-on-year, but it booked a low net profit in 2006, 2007, 2015, 2017 and 2020 because of higher loan-loss provisions, in line with lower asset quality.
The net fee income of the banking industry has continued to decline since 2018 as a result of the fee waiver for banking transactions following the implementation of PromptPay, the national electronic payment platform.
Usanee Liurat, an analyst at FSS International Investment Advisory Securities, said the banking sector is expected to record lower net profit in 2024 than last year, in line with the country’s sluggish economic growth.
Net profit growth for the banking industry would be 5-6% this year, compared with double-digit growth last year, she said.
The brokerage forecasts loan growth in the banking sector of 3% this year, said Ms Usanee.
The business sector should post marginal growth in both interest and fee-based income in 2024 year-on-year, noted the brokerage.
If the central bank maintains the policy rate at 2.5% throughout 2024, large local banks should keep a steady net interest margin this year, she said.
However, if the regulator cuts the rate this year, the net interest margin of big banks would decline accordingly, Ms Usanee said.
Ten SET-listed banks reported a combined net profit of 232 billion baht in 2023, up by 15.6% year-on-year, attributed to rising interest income as a result of policy rate hikes from 0.5% in August 2022 to 2.5% at present.
The listed banks reported combined loans worth 14.7 trillion baht in 2023, edging up 0.68% year-on-year.
“NPLs in the banking sector will continue to increase in line with economic trends, so banks will maintain a large loan-loss provision for this year, pressuring the bottom line,” she said.
INSURANCE CHALLENGES
In the insurance industry, car insurance is posing a challenge, particularly for EVs.
The shift to EVs in the coming years is expected to drive the growth of the motor insurance sector, said Claude Seigne, chief executive of AXA Thailand General Insurance.
However, providing insurance coverage for EVs is not an easy task as their value tends to depreciate sharply, making some insurers hesitant to offer policies, he said.
“Evaluating the price of EVs and accounting for their depreciation can be more complex than insuring ICE-powered cars. This is partially because of the rapidly evolving technology, the higher initial cost of EVs, and uncertainties regarding battery life and replacement costs,” Mr Seigne told the Bangkok Post.
“However, rather than causing hesitation, these challenges have prompted some insurance companies to innovate and develop more sophisticated models for pricing EV insurance.”
According to Mr Seigne, insurers are increasingly leveraging data analytics and technology to “accurately assess the risks and costs associated with insuring EVs”.
RISK MANAGEMENT REQUIRED
The Office of the Insurance Commission (OIC) expects EV car insurance companies to increase their risk management plans.
Apakorn Panlert, assistant secretary-general of the OIC’s insurance product supervision line, said the OIC collaborated with insurance businesses to develop EV products, which are labelled “Electric Vehicle Insurance Policy: Battery Electric Vehicle”.
The Thai General Insurance Association (TGIA) held a meeting to clarify guidelines for these products.
According to media reports, problems related to using EVs have begun to increase. For example, sales of EVs in South Korea recently fell for the first time in six years because of concerns about batteries catching fire.
The number of fast charging stations is still relatively low, while the prices of EVs are still relatively high, according to industry analysts.
Mr Apakorn said the OIC urged insurance firms to be cautious when insuring EVs, suggesting they begin by setting premiums that are appropriate for the risk, then consider the claims process.
“If there are risks for EV insurance, the OIC may require companies offering it to present additional risk management plans,” he said.
“OIC principles require regulations for products that provide protection against emerging risks.”
Somporn Suebthawilkul, president of the TGIA and managing director of Dhipaya Insurance, said the TGIA has concerns regarding EV insurance.
If an accident occurs, battery damage can be costly, as the EV battery generally accounts for 75-80% of the price of an EV, he said.
Around 100,000 EVs are expected to enter the casualty insurance system in 2024, pushing the system gross of insurance policies to 301-304 billion baht, an increase of 5-6% from 2023.
The entire EV car portfolio has total premiums worth 2 billion baht, with an average market premium rate of 17,000-20,000 baht per vehicle per policy year, according to the association.