The 2008 performance of the Thai banking system (12 banks) showed a net profit of THB84 billion, a YoY increase of 831.6 percent and net interest margin (NIM) rising to 3.62 percent over the 3.45 percent in 2007. Notably, commercial banks' profitability – as gauged by their NIM that reflects their core business performance – has begun to show signs of weakening since 4Q08. The quarterly NIM of Thai banks reached a peak of 3.75 percent in 3Q08 before moving downward to 3.55 percent in 4Q08.
In 1Q09, KASIKORN RESEARCH CENTER (KResearch) holds the view that NIM of the Thai banking system will remain under pressure from a continued unfavorable business environment amid the economic slowdown. The NIM would therefore likely be in a range of 3.42-3.50 percent, 0.05-0.13 percent lower than 4Q08, and 0.22-0.30 percent lower than 1Q08. This decrease is attributable to falling loan growth, plus rising liquidity that will likely generate lower returns in line with the falling policy rate, as well as possible deteriorations in asset quality amid poorer debt servicing abilities and impact from recent reductions in fixed deposit interest rates that has yet to be fully felt.
With the declining NIM, net interest income in 1Q09 is expected to remain stable, or drop from 4Q08. Likewise, fee-based income – another key source of income of commercial banks – may experience a QoQ decline in 1Q09. This is because the economic slowdown is expected to hamper credit extension, as well as trade-related financial transactions, thereby possibly resulting in lower fees from transactions related to credit, electronic banking and money transfers/payments, accounting for some 70 percent of total fee-based income.
This means that income from core businesses of commercial banks (including net interest and fee incomes) will likely fall from 4Q08. This does not yet incorporate provisioning expenses that are expected to remain high in continuation from 4Q08 due to customers' higher credit risks.
Despite the expected QoQ decline in income from core businesses, other items – e.g., operating expenses, which are prone to seasonal factors, and losses from investment, due to technical factors, totaling more than THB1 billion in 4Q08 - are likely to show an improvement. Overall, net profit of the Thai banking system in 1Q09 may increase over 4Q08.
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