Thai banks' increased loan-loss provisions bolsters confidence

It's in line with BoT's 'counter-cyclical buffering'.

According to Moody's, Thailand’s six largest commercial banks had reported their preliminary first-half 2013 results. A striking common theme underlying the results was the increase of loan-loss provisions as a counter-cyclical buffer. 

Here's more from Moody's:

Despite improving asset quality, Thai banks have proactively increased loan-loss reserves and directly added to their loss-absorption buffers during the generally favourable economic environment currently prevailing in Thailand.

Thai commercial banks overall reported a marked increase in loan-loss provisioning at the end of the first quarter, showing an inverse relationship with declining nonperforming loans (NPLs).

The recent earnings releases of the six largest Thai commercial banks also revealed that banks remain optimistically cautious in their lending activities.

Amid a generally robust first half, during which banks reported a strong average net profit growth of 10% supported by robust loan and fee income growth, five out of six banks set aside additional funds as counter-cyclical buffers. (Siam Commercial Bank Public Company Limited made additional provisions as counter-cyclical buffers earlier in first quarter 2013, but did not disclose the amount.)

As of December 2012, these six reporting banks held about 84% of the Thailand’s commercial banking system’s assets. With banks’ latest reports, we estimate that reserves now exceed the Bank of Thailand’s requirement by 41% on average.

The increased provisioning is in line with the so-called “counter-cyclical buffering” advocated by the Bank of Thailand and the Basel Committee, which aims for banks to add buffers during economic upturns and achieve more prudent provisioning to guard against hidden systemic imbalances and risks.

We believe that this provisioning approach is more forward looking than the traditional method of using an accountingbased “incurred-loss approach” tied to nonperforming loans.

Although these provisioning efforts have reduced the banks’ reported earnings by varying degrees, the credit benefits outweigh the negative earnings effects. Our assessment suggests that the magnitudes of countercyclical provisions set aside during this period were largely consistent with banks’ asset-quality profiles.

For instance, TMB Bank Public Company Limited set aside THB4.1 billion for counter-cyclical provisions in the quarter, the largest among the six banks, but it had the highest ratio of problem loans to gross loans (i.e., 4.07% as of June 2013).

By comparison, Krung Thai Bank Public Company Limited, whose NPLs were 2.95%, provisioned THB2.6 billion, and Bank of Ayudhya, whose NPLs were 2.40%, provisioned THB2.5 billion.

We do not believe that the accumulated absolute amount of reserves and related coverage ratio necessarily reflects the riskiness of the banks’ overall portfolio. Rather, these buffers illustrate a combination of each bank’s risk management policy and asset quality profile.

Nevertheless, the increased provisioning bolsters confidence in the system given the Bank of Thailand’s latest downward revision of the 2013 GDP growth forecast to 4.2% from 5.1%.

Thailand’s banking system also has a higher-than-required capitalization level, which provides an additional buffer against the risk of a cyclical slowdown: as of end of June, the average capital adequacy ratio under Basel III for the six banks was 15.96%, well above the 8.5% required by the Bank of Thailand.