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18 Oct 2023

Financial Institutions

Banks’ financial statements for 3Q23 still reflect adjustments to sustain their operating performance, despite the benefit of interest rate hikes (Current Issue No.3439 Full Ed.)


        Even though the rising domestic interest rates should boost interest income, deposit costs are also increasing. As a result, net interest margin (NIM) in the Thai banking system rose within a limited range in 3Q23. Meanwhile, the overall loans grew at a meager pace. Most commercial banks are accelerating their efforts in debt restructuring while adopting a proactive stance in non-performing loan management in order to maintain NPL levels and reduce pressure when it comes to setting aside expected credit loss. For the remaining period of this year, although the NIM might increase, the uncertain economic outlook continues to challenge commercial banks in maintaining other income. Additionally, banks must be prepared for the responsible lending guidelines which will take effect early 2024.

        KResearch anticipates that the recent upward adjustments in the policy rates and lending rates of commercial banks would help boost the NIM in the banking industry to stand in a range of 3.14-3.18 percent in 3Q23, whereas deposit costs might also increase. Loans continued to grow within a low range of 0.1-0.3 percent YoY in 3Q23, while the recent increase in yields of government bonds during the quarter might impact the mark-to-market valuation of financial assets in the commercial banks' investment portfolios. These factors when combined with the overall decelerating fees and service income might lead to a decline in the non-interest income in 3Q23 compared to the previous quarter.

        Under the condition where interest rates remain high amid economic uncertainties, asset quality management remains a key challenge. Commercial banks continue to monitor and assess borrowers’ debt repayment ability, assist customers in debt restructuring, while accelerating their  efforts in managing NPLs to maintain their levels and reduce pressure on provisioning expenses. Taking these factors into account, KResearch estimates that the NPL ratio in the commercial banking system may remain stable or fall slightly to around 2.63-2.67 percent of total loans in 3Q23. Meanwhile, credit cost might decrease modestly to a range of 1.25-1.29 percent in 3Q23, but still higher than the level during normal circumstances.

        In summary, the overall net profit in the Thai banking system for 9M23 may stand at around THB 186-191 billion. Net interest income is expected to continue growing and remain a significant driver for banks’ earnings performance in 4Q23 due to the potential upward adjustment of the NIM. However, maintenance of operating results amid the uncertain economic outlook both at home and abroad remains a challenge that has prompted commercial banks to accelerate their adjustments. In 4Q23, commercial banks will continue their efforts to address NPL issues and enhance liquidity to meet potential increase in demand following government economic stimulus measures. Also, focus should be on deposit growth in line with the signs of loan growth. Banks might introduce special fixed deposit campaigns to boost their liquidity and compete with other financial products among options for depositors later in the year. In addition, commercial banks need to prepare for compliance with the Bank of Thailand's responsible lending guidelines to be implemented at the beginning of 2024.

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Financial Institutions