Thai Banks Crawl Back To Health

New growth and better risk management have helped the sector shed its bad name

Ever since the 1997 Thai financial crisis, Andrew Stotz had felt like persona non grata. The last thing U.S. and European investors wanted to hear about was his specialty, Thai banks. They had a reputation as badly managed, high-risk players who started the crisis by borrowing recklessly from Western banks, then lending heedlessly to local businesses. "Nobody wanted to listen," says Stotz, head of research at Macquarie Securities (Thailand) Ltd. But Thailand is back in favor. And at road shows in Europe and the U.S. this year, Stotz has fielded questions from investors heavy in Thai stocks. "All of a sudden the reception has turned warm," he says.

At long last, it appears as though the Thai banking sector has recovered. Nonperforming loans have been brought down from 50% at their height in 1999 to just over 10% -- and are set to fall even further this year. Overall new lending, which languished for years after the crisis, grew 9.6% in 2004 and is set to rise 12% to 13% this year, according to J.P. Morgan Securities (Thailand) Ltd. That's thanks in large part to increased demand by Thai corporate borrowers who have finally worked off excess capacity and are investing anew. The country's three largest private-sector banks, Bangkok Bank, Kasikornbank, and Siam Commercial Bank, reported record earnings in 2004 and have started paying dividends again after a seven-year drought.

The banks' recovery is good news for both stock and bond investors. And foreigners, in particular, have been piling into Thai bank shares. Foreign investors' share of major bank stocks has risen to 40.7%. In February, credit-rating agency Fitch Ratings upgraded six major Thai banks on the economy's strength, higher loan growth, and better risk management. "Most of them have learned their lesson," says Chaiyapat Paitoon, associate director financial institutions at Fitch's Bangkok office.

At Kasikornbank, Thailand's second-largest private bank, prudence has paid off. Last year, loan growth was a healthy 9%, after deducting write-offs for nonperforming loans -- more than twice what the bank projected. Such gains helped the bank earn record pre-provision profits of $488 million last year, up 12%. Fewer bad loans than expected meant it could reverse provisions against loan write-offs. "We were very careful about the quality of loans we extended," says President Prasarn Trairatvorakul.

Another encouraging sign is that Thai banks are looking to move into nontraditional lines of business to help diversify their earnings and spread risk. The contribution of retail and consumer banking has risen from about 8% of revenue before 1997 to about 15% now for all banks apart from Siam Commercial Bank, which accounts for about 25% of personal housing mortgages, according to Standard & Poor's (MHP ). The banks have done that by expanding their offerings of auto loans, life insurance, mutual funds, mortgages, and credit cards. Kasikornbank even installed Starbucks (SBUX ) cafés in its retail branches.

Still, Thailand's role in triggering the Asian crisis when the baht devalued in 1997 keeps raising one question: Can it happen again? Unlikely, analysts say. Not only are banks more cautious, but the central bank, the Bank of Thailand, is ready to move when they aren't. Last year it launched an investigation into state-owned Krung Thai Bank, the country's second-largest bank, when its nonperforming loans ratio started to rise. BoT Governor Pridiyathorn Devakula then blocked the reappointment of the bank's president, Viroj Nualkhair, despite pressure from the government to keep him on the job."It's a different world from what we had, pre-crisis," says J.P. Morgan Securities' Thai banking analyst, Derek Bloomfield, in Bangkok. So much the better for Thailand.

By Frederik Balfour in Bangkok

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