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3 Nov 2006

Financial Markets

Commercial Banking, Q4/2006: Affected by Interest Expense and IAS39(Current Issue No.1915)

In Q3/2006, Thai commercial banks' operating results (unaudited) showed an aggregate net profit of THB23.6 billion, representing a year-on-year decrease of 5.68 percent, but rising by 19.2 percent over the quarter before. Likewise, the net interest margin (NIM) for Q3/2006 stood at 3.32 percent, increasing slightly over the 3.29 percent in the preceding quarter. However, the q-o-q increase in net profit could be attributed in part to dividends paid by the Vayupak Fund. Excluding this effect, banking performance was evidently affected by pricing competition through the higher deposit rates offered since late 2005.
In the final quarter of 2006, KASIKORN RESEARCH CENTER (KResearch) views that Thai banks' operating results will remain pressured by the heavier expenses of pricing competition in the form of higher deposit rates. Furthermore, International Accounting Standard No.39 (IAS39), as it relates to the Bank of Thailand's provisioning criteria that will be announced in November, will also prove to be a negative impact on the banking industry. Initially (or by the end of 2006), NPLs that are undergoing litigation will be affected by the new provisioning standards. KResearch thus estimates that an additional THB32 billion-THB82 billion may have to be set aside as provisioning by Thai commercial banks between Q4/2006 and the end of 2007 (before the criteria fully takes effect in 2008) to meet the new requirements. The necessity of setting aside additional provisions may reduce the Tier-1 capital status of Thai commercial banks from current levels. Nevertheless, all banks will be able to maintain their ratios of Tier-1 capital to risk assets (CAR) above the BOT's minimum requirement of 4.25 percent, even though some banks' ratios may drop close to the BOT's minimum requirement, necessitating capital increases to support business expansion later on.
Apart from the above factors, Thai banks may also have to record the impact of foreclosed assets sold to BAM (Bangkok Commercial Asset Management Co., Ltd.) if their foreclosed property portfolios can be settled on within Q4/2006, or may gradually set aside additional allowances for impairment of foreclosed properties in advance against losses on the sale of such foreclosed property.
Finally, although the provisioning standards of IAS39 and sales of foreclosed property to BAM may incur additional expense and affect the financial status of Thai banks in the future, it is vital to view this change as bringing greater stability to commercial banking and the Thai financial system in the long run through the enhanced competitiveness of Thai commercial banks.

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Financial Markets