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18 Oct 2023

Econ Digest

KResearch deems that the banks’ financial statements for 3Q2023 still reflect adjustments to sustain operating performance, despite benefiting from interest rate hikes

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        Even though rising domestic interest rates should boost interest income, the cost of deposits is also increasing. As a result, the net interest margin (NIM) in the Thai banking system rose within a limited range in 3Q2023. Meanwhile, the overall loans grew at a meager pace. Most commercial banks are accelerating their debt restructuring efforts, while adopting a proactive stance in non-performing loan management in order to maintain NPL levels and reduce pressure to set aside expected credit losses. 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 prepare for the responsible lending guidelines that will take effect in early 2024.

        KResearch anticipates that the recent upward adjustments in the policy rates and loan interest rates of commercial banks would help boost the NIM in the banking industry to stand in the range of 3.14-3.18% in 3Q2023, while the cost of deposits might also increase. Loans continued to grow within a low range of 0.1-0.3%YoY in 3Q2023, while the recent increase in yields of government bonds during the quarter might impact the mark-to-market valuation of financial assets in commercial banks' investment portfolios. These factors, combined with the overall decelerating fees and service incomes, might lead to a decline in the non-interest income in 3Q2023 as 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 the management of NPLs to maintain the level of NPLs 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% of total loans in 3Q2023. Meanwhile, the cost of credit might decrease modestly to a range of 1.25-1.29% in 3Q2023, but remains higher than the level under normal circumstances.

        In summary, the overall net profit in the Thai banking system for 9M2023 may stand at around THB186-191 billion. Net interest income is expected to continue growing and remain a significant driver for banks’ earnings performance in 4Q2023 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, which has prompted commercial banks to accelerate their adjustments. In 4Q2023, commercial banks will continue their efforts to address NPL issues and enhance liquidity to meet the potential increase in demand following the government’s economic stimulus measures. Also, the focus should be on deposit growth in line with signs of loan growth. Banks might launch 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 be prepared to comply with the Bank of Thailand's responsible lending guidelines, which will be implemented in early 2024.

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