Banks continue threatened by bad loans

BANGKOK (AFP): Thailand’s embattled banking sector will slowly begin to recover in 2001, but a morass of non-performing loans will continue to dog the industry, Merrill Lynch said in a report released today. The outlook for the banking sector next year is cautiously positive, but recovery could be pushed off course by the mountain of bad loans, or if the US economy suffers a sharp decline, Merrill Lynch Phatra said. After losing money in 1999, Thai banks will push back into the black in 2000, the report said. Yet, “Since Thailand’s economic recovery remains fragile and narrow-based, a hard landing for the US economy could do serious damage to the asset quality of Thai banks.” Although non-performing loans (NPLs) have decreased from 47 percent of total loans in January 2000 to 38 percent today, the remaining debt burden will be extremely difficult to restructure, Merrill Lynch warned. Many of the remaining NPLs are in sectors such as property that were decimated by the Asian economic crisis and will probably take years to rebound. Some analysts have charged that Thai banks are now putting off restructuring the toughest NPLs by rescheduling the debt well into the future. “New and relapsing NPLs could wipe out banks’ operating profits and eat into their already thin capital,” Merrill Lynch warned. The NPL quagmire also has a major impact on the growth of new bank loans, which are crucial if Thai companies are to shrug off the financial crisis and begin expanding again. “Unfortunately, loan growth remains sluggish. Outstanding loans have contracted 5.4 percent in the year to date,” Merrill Lynch said. And because NPLs have made banks less attractive to share investors, the banking sector of the Stock Exchange of Thailand (SET) has fallen over 55 percent this year, depriving institutions of the capital they need to make loans. Thailand is holding national elections on January 6, tipped to be won by the Thai Rak Thai party. The party has indicated it will implement a debt moratorium if elected, a move that some analysts believe would only exacerbate Thailand’s culture of debt non-payment, thereby dealing further blows to the banking sector.