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1 Dec 2005

Financial Markets

Thai Commercial Bank Loans, 2006: Growing Amid Rising Interest Rates

In the midst of economic slowdown during the first nine months of this year (9M-2005), loans in the Thai banking system unavoidably felt the pinch. Evidently, loan growth saw deceleration from the same period of last year. Taking into account only performing loans, it was found that in 9M-2005 net performing loans in the Thai banking system reached some Baht232 billion (rising by about 5.4 percent over the end of last year), slowing from the Baht343 billion seen during 9M-2004 (representing an increase of 8.94 percent over the end of 2003.) At the end of September 2005, performing loans in the Thai banking system had grown 8.13 percent, over-year, slowing from growth of 11.75 percent at the end of December 2004. This slowdown in loans was felt in various types of loans, such as construction and consumer loans. This was in line with slowing construction and setbacks in the confidence of the business and household sectors during the year.

In the remaining three months of this year it is expected to see Thai commercial banks make their fullest efforts to extend credit. If they want to meet their targets for credit extension set earlier this year, loans will have to increase by THB100 billion during the final quarter. This implies that performing loans, as of the end of this year, will grow by some 7.9 percent, year-on-year. However, Kasikorn Research Center (KResearch) forecasts that these targets set for credit extension may be too ambitious, as consumption and investment have only just emerged from the doldrums. Under these circumstances, KResearch expects that performing loans for 2005 may grow only 6.6-7.3 percent (or about THB280-310 billion in net new loans), slowing from the growth of 11.75 percent in 2004 (or around THB450 billion in net new loans).

In the year to come, the Thai economy will likely grow further, which will be a boon to demand for loans. However, this expected upbeat economic growth may coincide with hikes in lending rates that may jeopardize demand for household loans that are more vulnerable to rising interest rates than demand for investment expansion from the business sector. As a result, slowdowns in home and credit card loans are likely to continue into next year. However, business loans are projected to grow well and will be an important variable to promote the overall loan growth of the Thai commercial banking system in 2006, so that it will not be less than the loan growth of 2005, particularly in industries where capacity utilization is reaching its maximum, and those export-oriented industries, construction and tourism. Nevertheless, the upward interest trend may cause commercial banks to increase their caution in loan extension. Therefore, overall, KResearch forecasts that the performing loans of Thai commercial banks in 2006 should grow around THB280-330 billion, or about 6.2-7.3 percent; similar to the forecast for this year at THB280-310 billion, or 6.6-7.3 percent. (The growth rate of performing loans in 2006 would be lower than that of 2005 as a result of a larger performing loan base).

A point that must be pursued next year is the impact of trade liberalization on the competitiveness of banks' business loan customers. Although, at present, NPL problems are much less than in the past, the remaining NPLs are very complex in nature, and rivalry in loan expansion among commercial banks is getting tougher (due to the number of players in the market who have undergone upgrades, mergers and business restructuring to enhance their competitiveness, and to conform with the Financial Institution Master Plan), coupled with the risk that commercial banks' net interest income may be affected by pressure to raise interest rates further in 2006. Finally, these factors may cause Thai commercial banks to adjust by turning to loan markets that give higher yields (as well as higher risk), such as SME loans and retail loans. Such changes under the current interest cycle and tenser rivalry will be important proofs on the risk analysis and management systems that each Thai commercial bank has been developing since the financial crisis in 1997.

Financial Markets