The year 2018 was another year with numerous issues to monitor in the commercial banking sector throughout the year. Despite significant challenges from the decline in fee income following the reduction of digital transfer fees, there were positive aspects that helped offset this, particularly the growth in loans, which is expected to finish 2018 with a growth rate exceeding the Kasikorn Research Center's forecast of 6.0%, driven mainly by a surge in retail loans in the final quarter of the year.

 

However, it must be acknowledged that there are several critical issues awaiting in 2019 that challenge the profitability of commercial banks. These include the economic outlook, which may expand at a slower rate than in 2018, likely limiting overall loan growth to around 4.0-6.0%. This necessitates close monitoring of credit quality, especially as domestic interest rates may gradually rise during 2019 amid economic recovery. Additionally, the gradual transition to the digital era in 2019 may compel commercial banks to prepare for intensified competition, both from digital models among themselves and from other players such as FinTech, TechFin, and e-commerce operators.

 

Loan growth in 2019 is expected to slow to 5.0% due to economic conditions.

  • Commercial bank loans[1] in 2019 may grow at a slower pace than in 2018, in line with the overall economic outlook for Thailand. The Kasikorn Research Center predicts that loans from registered commercial banks in Thailand in 2019 may grow by approximately 0% (with a forecast range of 4.0-6.0%), down from an expected 6.0% growth in 2018. Loans that are likely to continue growing well arebusiness loans, which may grow by about 4.5% in 2019, up from the forecast of 4.2% in 2018, primarily benefiting from anticipated investment trends that are expected to drive the Thai economy in 2019.

Meanwhile, the growth ofretail loans may slow to 6.0% in 2019 (down from a potential growth of over 8.5% in 2018) due to home loans and auto loans, which together account for over 70% of the retail loan portfolio, facing growth constraints. The acceleration of activities in the real estate market before the housing loan regulations take effect in April 2019 may support home loans to continue growing strongly in Q1 2019 at around 7.5-8.0% YoY before slowing down in the remaining part of the year according to the real estate market situation, leading to an overall growth of home loans in 2019 at about 5.0% (compared to an expected growth of 7.0% in 2018). Meanwhile, auto loans may expand at a slower rate of 5.5% (down from expected double-digit growth in 2018) due to anticipated declines in car sales in 2019 compared to over 1 million units sold in 2018. However, promotional campaigns and special offers are expected to help credit card loans and personal loans continue to grow at around 7.0% in 2019.

 

Non-performing loans remain a continuous concern.

 

  • Credit quality will continue to be a closely monitored issue in 2019, especially as the recovery of the Thai economy remains uncertain and domestic interest rates may gradually rise. Therefore, it is expected that commercial banks will continue to proactively manage credit quality issues in 2019, including customer monitoring, debt restructuring, and addressing issues when borrowers face difficulties and lack the capacity to repay.
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The Kasikorn Research Center anticipates that the non-performing loan (NPL) ratio may rise to 2.98% by the end of 2019, up from 2.91% at the end of 2018 (down from 2.94% in Q3 2018). Notably, SME loans and home loans will be particularly monitored in 2019, with expected NPL ratios of 3.42% and 3.70% for each loan type, respectively.

 

            The issues surrounding the quality of the aforementioned loans may lead banks to incur provisions for doubtful debts in 2019 at levels not significantly lower than in 2018. This suggests that the ratio of provisions for bad debts and doubtful debts to total loans (Credit Cost) reflecting the risk costs of lending in 2019 may remain stable compared to 2018. Additionally, commercial banks must prepare to comply with regulatory requirements gradually implemented in 2019 regarding housing loan measures and capital adequacy standards under Basel III, as well as new accounting standards (IFRS 9) in 2020.

 

The trend of general interest rate hikes by commercial banks... will likely wait for the right timing in line with economic context and lending activities.

 

  • Commercial banks may wait for the right timing before gradually raising general interest rates.

 

            The Kasikorn Research Center believes that although the Monetary Policy Committee of the Bank of Thailand has begun to raise the policy interest rate for the first time in 7 years to 1.75% per annum in the meeting on December 19, 2018, and the MPC may have the opportunity to raise the policy interest rate at least once more during 2019 if the Thai economy can sustain better growth, it is expected that commercial banks will consider the appropriate timing for general interest rate hikes to avoid potential impacts on customers and the overall economy, given the liquidity in the commercial banking system still stands at 3.8 trillion baht, and commercial banks can still manage their financial costs effectively.

 

            It is expected that some interest rate hikes will be seen in the first half of 2019, such as special fixed deposit rates and long-term home and auto loan rates. Meanwhile, the magnitude of general interest rate hikes for both deposits and loans may occur during 2019, likely in the second half of the year after the elections, as commercial banks will also need to consider the economic context, loan demand, and borrowers' repayment capacity.

 

 The environment in 2019 remains full of challenges for commercial banks.

  • Commercial banks will continue to face multiple challenges in 2019, particularly in maintaining overall profitability and managing asset quality. This situation represents ongoing pressure from 2018, even though the opportunity for commercial banks to raise interest rates may help improve the net interest margin (NIM) from 3.2% in 2018.

In addition to the intensifying competition in the loan market, it is expected that in 2019, we will see more online lending models, utilizing customer transaction data to analyze and offer special conditions to stimulate loan utilization and expand new customer bases. Although credit card loans and personal loans (unsecured) may not directly benefit from the anticipated gradual rise in domestic interest rates in 2019, they are high-yield loans that should help offset some of the impacts from the reduction in online transaction fees affecting overall fee income.

            Furthermore, the Kasikorn Research Center expects that overall fee income will continue to be a key issue to monitor, especially in the first half of 2019, due to the ongoing impact of money transfer fee income, which may remain negative until Q1 2019. This will require commercial banks to continuously strive to boost fee income from other sources, including credit card fees, fees from insurance and mutual fund brokerage, and advisory service fees, to improve the overall fee income picture in 2019 compared to 2018. Meanwhile, profit recognition from investments in 2019 may still depend on the appropriate timing of overall market conditions.

            Additionally, the gradual transition to the digital era in 2019 may compel commercial banks to prepare for challenges on another front, which is the intensifying competition in the financial services market from other players such as FinTech, TechFin, and e-commerce operators who can leverage technology to meet consumer financial service demands with potentially lower costs and greater agility. This makes it crucial for commercial banks to focus on building competitive capabilities, expanding customer bases, and generating new revenue from existing platforms, alongside collaborating with partners and developing technology for new service models that meet the needs of consumers and business clients.

 

[1] 19 registered commercial banks in the country.