By Cary Springfield, International Banker
Recent months have seen credit-rating agencies Fitch and Moody’s grow increasingly pessimistic regarding Thailand’s banking sector, with the firms revealing that the sector faces intensifying headwinds that will hinder banks’ asset quality and profitability prospects this year. With a weakening domestic economy chief among those challenges, thanks in no small part to the imposition of hefty trade tariffs by the United States, Thai lenders face a decidedly tricky operating environment over the coming months.
Not long ago, Thailand’s banking sector appeared to be in fine health. The Bank of Thailand’s (BoT’s) May 20 assessment of the performance of key Thai lenders during the first quarter, for instance, highlighted the sector’s resilience, as evidenced by its robust levels of capital, loan-loss provisions and liquidity. “The banking system’s profitability improved from the previous quarter, mainly due to lower operating expenses (particularly a seasonal decline in marketing expenses and IT expenses) and higher non-interest income (from investments and the revaluation of financial instruments),” the central bank stated.
Nonetheless, it did acknowledge that loan growth in the banking system had contracted by 1.3 percent year-on-year, primarily due to the high level of debt repayments among small and medium-sized enterprises (SMEs) and consumers who continued to represent elevated credit risks. The banking system’s nonperforming loans (NPLs) expanded during the quarter to 548.1 billion baht, resulting in an NPL ratio of 2.90 percent, mainly driven by worsening SME-credit and mortgage-loan performances. A moderate increase in NPL ratios for credit card and hire-purchase loans was also attributed to a decline in the loan base.
“Our through-the-cycle view on the banks’ operating environment (OE) remains stable despite our view of sector performance deteriorating during 2025,” the BoT’s report concluded. “The environment for Thai banks is supported by the country’s improving GDP-per-capita and our assessment of operating risks. The implied OE score is adjusted upwards to reflect the sovereign rating of ‘BBB+’/Stable and our expectation that the Thai authorities are supportive of macro-economic and financial system stability.”
In the second quarter, these economic and banking prospects faded dramatically, as the escalation of US punitive trade measures against its trading partners dented Thailand’s distinctly export-oriented economy’s outlook. In Fitch’s June 19 assessment of regional economies, which also included South Korea and Vietnam, it deemed Thailand’s economy to have grown at the slowest rate this year, below 2 percent.
The ratings agency then followed up this report on July 22 by officially lowering its growth estimate for the Southeast Asian kingdom, projecting that growth in gross domestic product (GDP) will moderate to 1.9 percent in 2025 from 2.5 percent in 2024. Fitch cited the US’ 36-percent reciprocal tariff on Thailand, effective from August, as the key factor for this downgrade, with the protectionist measures likely to dampen export competitiveness and thus weigh heavily on growth.
Fitch’s reports adopted similarly negative tones to those of fellow rating firm Moody’s, which in late April announced that it was downgrading Thailand’s sovereign-rating outlook from ‘stable’ to ‘negative’ due to the US tariff regime having a likely “material negative impact” on the country’s economy. “The decision to change the outlook to negative from stable captures the risks that Thailand’s economic and fiscal strength will weaken further. The already announced US tariffs are likely to weigh significantly on global trade and global economic growth…which will affect Thailand’s open economy,” Moody’s explained in an April 29 statement.
“This shock exacerbates Thailand’s already sluggish economic recovery post-pandemic and risks aggravating the trend decline in the country’s potential growth,” the statement also noted. “Material downward pressures on Thailand’s growth raise risks of further weakening in the government’s fiscal position, which has already deteriorated since the pandemic.”
Moody’s then followed up this action by issuing downgrades from ‘stable’ to ‘negative’ for its outlooks of seven of Thailand’s largest banks, including Bangkok Bank, Export-Import Bank of Thailand (EXIM Thailand), KASIKORNBANK (KBank), Krungthai Bank (KTB), Siam Commercial Bank (SCB), SCB X and TMBThanachart Bank (TTB). Again, the country’s expected deterioration in economic and fiscal strength was cited by the credit-ratings agency for the action taken.
“A deteriorating macroeconomic backdrop could weigh on the credit profiles of Thai banks, which have already been struggling with loan growth and asset quality issues exacerbated by the coronavirus pandemic. It would also weaken the Thai government’s capacity to support the banks when required,” the Moody’s April 30 statement read. “If Thailand’s sovereign rating is downgraded, it would lead to rating downgrades for the seven Thai financial institutions mentioned, given that their long-term deposit and/or issuer ratings include government support uplift and/or are now the same as the sovereign rating.”
Moody’s also warned that downgrades would be administered to the banks’ long-term deposit and/or issuer ratings should Thailand’s sovereign rating be downgraded. “Their ratings would also be under downward pressure if there is a material weakening in their standalone creditworthiness or a significant deterioration in the domestic operating environment for banks,” the assessment acknowledged.
Fitch, meanwhile, projected that asset quality across Thailand’s biggest lenders would take a hit amid the increasingly bearish economic environment, while lending activities would potentially be hindered by restricted business opportunities, with harsher constraints on deleveraging. Thailand’s ongoing rate-cut cycle, which has seen its benchmark interest rate fall from 2.5 percent in August 2024 to 1.75 percent today, will further limit banks’ lending margins, Fitch added.
The country’s highly leveraged corporate and household sectors are also being cited as crucial factors in exacerbating the pressures of bad debt on the banking sector’s loan quality. “Household debt to GDP ratio decreased from the previous quarter, driven by a slowdown in household debt. However, there remains a need to closely monitor the debt serviceability of vulnerable households,” the BoT warned in its first-quarter (Q1) assessment. “Corporate debt to GDP ratio decreased in Q4/2024, mainly due to a slowdown in debt securities issuance.”
The overall impact on banks’ asset quality and profitability, therefore, prompted Fitch to revise its 2025 outlook for Thailand’s banking sector to ‘deteriorating’ from ‘neutral’. That said, it also deemed Thailand’s economic slowdown as unlikely to be substantial, stating that labour markets would remain stable. In turn, this should help to prevent a sustained downside to banks’ key metrics, while the improvement in banks’ earnings since the COVID-19 pandemic would provide a buffer against short-term weaknesses.
In an earlier report, meanwhile, Moody’s confirmed that Thai banks will not be materially affected by the devastating earthquake that hit the Sagaing Region of neighbouring Myanmar, inflicting some damage in Thailand. With limited disruption to Thailand’s business sector being reported and local banks having minimal exposure to Myanmar and domestic insurers, the earthquake’s impacts on Thai banks are unlikely to be significant.
“Thai banks do not have a significant exposure to Myanmar, which experienced severe destruction of properties and loss of lives,” Moody’s stated. “However, the stakes [in domestic insurers] mostly amount to minority ownerships and account for a very small percentage of the banks’ assets.” However, the earthquake’s sustained economic effects may nonetheless affect Thai banks. “A further recovery in Thailand’s tourism sector, which is a major driver of the economy, could be hindered as foreign visitors delay or cancel their trips.”
As for the introduction of three new virtual banks into Thailand’s banking sector, which the Ministry of Finance (MoF) approved on June 19 following a joint review of applications by the ministry and the Bank of Thailand, Moody’s predicted they would pose a “limited” competitive threat to incumbent banks. The three successful applicants are consortiums led by:
- ACM Holding Company, a part of Thailand’s largest conglomerate, Charoen Pokphand Group (C.P. Group);
- Krungthai Bank Public Company (KTB), Advanced Info Service Public Company (AIS) and PTT Oil and Retail Business Public Company Limited (PTTOR); and
- SCB X Public Company (SCBX), KakaoBank and WeTechnology, backed by WeBank.
While the introduction of these entrants will increase competition in the banking sector, Moody’s noted, the firm did not expect them to disrupt most incumbent banks over the next three to five years—partly because they will operate under regulatory restrictions during the initial period, but also because their main lending foci are on customer segments that incumbent banks typically avoid.