Higher risk of defaults on the horizon for Thai banks

Household leverage has reached “unsustainable levels”, says S&P Global Ratings.

Thai banks are facing heightened credit risk amidst structural issues that include high household debt and corporate debt.

Thailand’s household leverage, at 89%, is one of the highest amongst emerging markets globally. S&P Global Ratings warned that it has reached “unsustainable levels” and leads to elevated risk of default.

“Credit risk remains heightened due to structural issues. These include high household debt and corporate debt as well as pre-existing weaknesses in the small to midsize enterprise (SME) segment,” S&P primary credit analyst Deepali V Seth Chhabria said in a report.

The government is taking steps to repair household balance sheets and boost SMEs' competitiveness. However, it would take time to see a structural shift.

Banks' credit costs for the system—as measured by credit costs of the top six banks, which form 80% of the banking system—should remain elevated at 1.5% for the next two years at least. 

“Banks have aggressively managed bad loans by selling them off, or in writing them down. That and stabilizing economic trends will help prevent a post-forbearance jump in NPL ratios, which may inch up to 3.5% of total loans by 2025, from 2.8% as on June 30, 2023,” Seth Chhabria noted.

On a more positive note, good capital and provisioning levels offer some cushion. 

“Thai banks generally have good credit buffers relative to peers, with high capital adequacy ratios at 19.5% and provision coverage at about 176%, as of June 30, 2023. Banks' improving earnings also aided these buffers. We believe the Thai banks we rate can absorb the blow from deteriorating asset quality,” Seth Chhabria said.