Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

If there's one person who should be a wee bit nervous about Bank of Nova Scotia's decision to review its eight-year-old presence in Thailand, it's ANZ's incoming CEO Shayne Elliott.

The Australia & New Zealand Banking Group, which got a banking license in the country just six months ago, has bet big on Thailand as part of its so-called "super regional strategy."  So far, the gamble has failed to impress. As Bloomberg News' Narayanan Somasundaram noted in a recent article, ANZ's overseas operations used up nearly a third of the bank's capital to produce less than a fifth of its profit. Now with the Canadian lender considering strategic options for its 49 percent stake in Bangkok-based Thanachart Bank, Elliott might wonder why the Aussie bank is entering a party others seem more keen on leaving.

Short term, Thailand is hardly a market into which bank shareholders would want to pour new capital. The credit boom of 2011-2013, when foreign lenders participated with nearly as much enthusiasm as they showed toward China, had ended even before the military coup in May 2014.

Three years of sub-3 percent GDP growth has already raised the ratio of non-performing loans in the nation to 3.3 percent of total advances, from 2.6 percent at the end of December 2013, according to Fitch Ratings, which expects credit risks to keep rising next year. Add an ageing population and a stunted democracy, and it seems Scotiabank may be right to prefer the Dominican Republic:

Fading Credit Boom
Global banks' exposure to Thailand is slowing after rising as quickly as their loans to China
Source: Bank for International Settlements
Notes: Percentage change in foreign claims on ultimate risk basis

But looking beyond the present difficulties, it's still possible to build a long-term case for Thailand's banking market. That's because of its role as a trade and transport gateway to Myanmar, Cambodia, Laos and Vietnam, as well as China's Yunnan province and its Guangxi Zhuang autonomous region. Those are some very promising frontier economies.

However as much as ANZ might want to profit from growing trade and investment flows in the Mekong River basin, it's not clear if its Japanese and Chinese rivals would give it much room to succeed.

Sumitomo Mitsui Trust Holdings also won a banking license in Thailand this year, Mitsubishi UFJ already owns almost 77 percent of Bank of Ayudhya and China's biggest lender, Industrial & Commercial Bank of China, entered the fray five years ago by acquiring ACL Bank.

Standard Chartered Stands Out
Major Thai banks' non-performing loan ratios (first half of 2015)
Source: Fitch Ratings

Japanese and Chinese lenders are coming to a region where they already have a ready base of familiar banking relationships: Japan, historically the No. 1 source of foreign direct investment in Thailand, may be surpassed this year by China. In addition, both Tokyo and Beijing will sink billions of dollars into the Mekong region as they compete for greater influence. 

Just this month, China and Thailand launched a rail link, which will eventually become part of an ambitious transport corridor connecting Yunnan province's capital Kunming to peninsular Malaysia. Not to be outdone, Japan wants to build a rival network joining Myanmar, Thailand, Laos and Vietnam, which may give it a leg-up over China in the Strait of Malacca, a choke point through which about one-sixth of the world's oil passes every year. 

Participating in this great power game as a modern-day Medici may be far beyond the risk-taking appetite of ANZ's shareholders. Standard Chartered's travails in Asia, including the bank's bad loan burden in Thailand, should serve as a cautionary tale. And now with the Canadians having second thoughts, Elliott may need to rethink his predecessor Mike Smith's decision to chase growth in Asia. Thailand could be a great long-term opportunity for Mitsubishi UFJ and ICBC, whose balance sheets are four to six times larger than ANZ's. For the second-biggest Australian bank by assets, the reward might not be worth the risk.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net