Foreign banks consider branching into Thai banking
Nine months after Japan’s Bank of Tokyo Mitsubishi UFJ acquired a 72% stake in Thailand’s Bank of Ayudhya, analysts predict a further shakeout amongst the country’s 16 commercial banks. How much further does consolidation of Thailand’s banking sector have to go? Ben Davies reports.
“We plan to build Krungsri [the local name for BAY] into a top-tier commercial bank by offering a full suite of financial products and services to retail customers as well as corporate clients in Thailand and in the region,” he tells Asiamoney.
As a statement of intent, it’s not spectacular. Many bank chief executives would attest to similar goals. Yet in Goto’s case, the words underline a potential strategic shift at the bank. He was, after all, appointed to run BAY by Mitsubishi UFJ Financial Group (MUFG) after it bought a 72% controlling stake in the lender in December 2013. It offers a concrete foundation from which to deliver the broader strategic platform Goto mentions.
“By leveraging Mitsubishi UFJ Financial Group’s strong global network and international financial expertise, we are well positioned to meet local and global banking needs in the Asean [Association of Southeast Asian Nations] region,” he asserts.
MUFG’s acquisition of BAY marks the latest in a long tradition of foreign takeovers in Thailand’s banking market. Many of the 16 registered commercial banks are foreign-linked or owned. However, most are small, with the ‘big four’ controlling more than 50% of total assets in the banking system. The Bank of Thailand has long made it known it would favour a smaller number of stronger players.
In the short to medium term, most bankers do not expect the foreign takeover of BAY to have a big impact on Thailand’s four major banks.
A report issued by Fitch Ratings points out that BAY’s focus on retail lending, particularly auto-hire purchase and credit cards, is very different to the corporate and investment-banking services offered by major local banks.
Even if BAY wanted to target big Thai corporate customers, it would first need to build a universal banking platform, which it currently lacks.
“In the first or second year after the merger, I do not see much affect on the banking sector,” says Tanapat Chatsatien, bank analyst at Trinity Securities in Bangkok. “It will take time for BTMU [Bank of Tokyo-Mitsubishi, MUFG’s banking arm] to adjust to the Thai banking sector.”
Yet a further shakeout of the local banks is almost certain over the longer term. Rising competition is driving the trend, especially amongst small and medium-sized banks that lack scale.
“Consolidation is inevitable, and the banking sector will be the first to benefit,” says Boontuck Wungcharoen, chief executive of TMB Bank. “Smaller banks are pressured by both higher operating costs as well as higher deposit costs, and they are vulnerable if their assets cannot consistently produce the required risk-adjusted returns.”
Could MUFG’s acquisition of BAY portend further banking consolidation?
Bank sector appeal
There are plenty of local and foreign financial groups seeking to bolt on services they have lacked the time or patience to develop, as recent consolidations demonstrate.
In September 2012, Kiatnakin Bank merged with Phatra Capital to create a financial group with more diversified revenue sources. The deal gave Phatra access to a bigger balance sheet, while Kiatnakin gained an institutional client base. “It replaced a weakness with a strength,” says Tanapat.
Foreign-bank interest stretches further back. In January 2009, Malaysia’s CIMB Group completed its takeover of a 92% stake in BankThai. The following year Industrial and Commercial Bank of China purchased a controlling stake in Thailand’s ACL Bank.
It’s easy to understand the attraction of Thailand’s banking sector to foreign players. The country has a sizeable population and consistently high foreign direct investment. Better still, it has the potential to become a hub for intra-regional trade.
Net interest margins (NIM) at around 3% compare favourably with the 1%-1.5% level in Japan and 2.5% in Malaysia, where price competition on loans to business and retail clients is higher. “The big Thai banks still have pricing power,” says Vilailuck Patharavanakul, banks analyst at Deutsche Tisco Investment Advisory in Bangkok. “They are more profitable and less volatile than banks in Malaysia.”
Just how profitable local banks can be was shown in the first quarter, when Thailand’s big four posted a combined net profit of Bt42.3bn ($1.3bn), a 3.82% year-on-year increase. This came despite the country’s worst political crisis in more than a decade culminating in the military coup of May 22.
DB Tisco is maintaining its 6%-plus loan-growth target for this year thanks to improved economic conditions. “We see stronger-than-expected signs of loan demand from the SME and government-related sectors, which should accelerate further once the military government appoints a cabinet in October,” says Vilailuck.
There is another reason why foreign banks may be tempted to buy into local banks sooner rather than later: the limited number of small and medium-sized banks still available. “For anyone who wants to acquire a banking business in Thailand, there are now very few choices,” says Tanapat.
Increasing red tape is also a potential catalyst for local banks to consider selling to larger local or foreign players. Some analysts believe that full implementation of Basel III could increase pressure on smaller Thai banks.
It’s not an immediate concern. In a report issued in early 2014, Fitch said Thai banks have improved their Tier 1 capital ratio to 12.4% of risk-weighted assets, up from 11.3% in 2009. But as the operating environment becomes tougher and margins are squeezed, the balance sheets of some banks are likely to come under pressure once more.
Looking to TMB
The bank most commonly tipped as Thailand’s next M&A target is TMB Bank, its seventh-largest commercial bank by assets.
It’s easy to see why. As recently as 2008, it faced bankruptcy, haemorrhaging money from non-performing loans (NPLs) and burdened by provisions. Under Boontuck’s hand it has undergone a dramatic makeover. He has slashed NPLs from 12.1% in January 2010 to 3.4% in July, increased deposits and lowered funding costs.
“Boontuck inherited a number of problems and he has done a commendable job in fixing them,” says Angus Kent, managing director of Macquarie Securities (Thailand). “But can TMB compete against the big banks in a measurable way going forward?”
It’s a question that Boontuck has attempted to answer by boosting earnings and rolling out profitable new products. “Even though we are about half the size of the big [Thai] banks in terms of branch network, our deposit-led strategy has already achieved a low-cost and stable deposit base that rivals them,” he tells Asiamoney. “We have to work harder than everyone else, especially to keep our costs low while scaling up the magnitude of transactions.”
The bank has many admirers. “Small banks have been hurt by increasing competition from more efficient larger banks,” says David Beller, banking analyst at CLSA. “But TMB executed on its strategy to improve their deposit franchise and risk management, which resulted in increased returns.”
That’s only fed speculation that it could end up in play. Many bankers say (and may well hope) that it is only a matter of time before TMB’s major shareholders, including ING and the Ministry of Finance, sell out. An oft-mentioned potential buyer is Malayan Banking (Maybank).
The speculation derives in large part from the announcement in July of a three-way merger between CIMB, RHB Capital and Malaysia Building Society. If successful, that consolidation would create Malaysia’s largest banking group and a new Asean giant. Speculation is mounting that Maybank may seek to regain its dominant position through an offshore acquisition. TMB Bank could be a good fit.
Its shares have already risen in anticipation of a future takeover by a foreign bank.
Boontuck refuses to be drawn on the likelihood of an M&A deal. “I cannot comment on behalf of our shareholders or investors,” he says. The 57-year-old CEO points out that TMB’s transformation has produced a bank with a strong foundation that can continue to grow. “The benefits of the transformation are not yet fully realised,” he adds. “And that makes us an attractive bank.”
TMB is not the only group being eyed by foreign banks. Land and Houses Bank is also touted as a possible takeover candidate. Although considerably smaller than TMB, with just 109 branches, 1,350 employees and total assets of Bt147bn, it made it known in recent years that it would favour a foreign strategic partner to provide international access.
“LH Bank is high up on the list of possible M&A targets, although I don’t know who will be in on the deal,” says one analyst.
While foreign banks may be eyeing opportunities in Thailand, Thai banks are moving aggressively into neighbouring countries.
Bangkok Bank, Thailand’s largest commercial bank, now has 27 branches and representative offices in 11 countries. They include Laos, Myanmar and Vietnam, which form part of the Greater Mekong Subregion (GMS). Recently, the bank applied to upgrade its Myanmar representative office into a full branch to take advantage of the country’s potential.
“The Thai market is growing fast, but it is becoming saturated,” Kobsak Pootrakool, executive vice-president of international banking at Bangkok Bank said earlier this year. “That is why the countries on our border provide a very good opportunity for us.”
Siam Commercial Bank (SCB), which ranks amongst the top-four Thai banks, is also looking to beef up its presence in the GMS region, attracted by rising cross-border investment from Thai companies, fast-expanding local economies and relatively undeveloped banking sectors.
“In the past, SCB’s focus has been primarily domestic,” says Kamalkant Agarwal, adviser to the chairman at Siam Commercial Bank. “But over the last three years, the bank has decided to revisit its international strategy. The ambition is to become one of the leading international banks in the GMS region.”
It’s all part of a strategy to build a bridgehead in the GMS, prior to the launch of the Asean (Association of Southeast Asian Nations) Economic Community at the end of 2015. Eventually, full liberalisation of financial services is slated to take place under the Asean Banking Integration Framework.
Yet the big Thai banks have a long way to go before they catch up with regional rivals. Currently they generate an average of 15% of revenues from overseas operations compared with an estimated 40% from banks in Singapore and Malaysia.
Fitch Ratings is not convinced that recent expansion into the GMS will give Thai banks an edge over foreign competitors who enjoy considerably larger intra-regional business. Previous overseas forays by Thai banks ended in disaster. Following the Asian financial crisis in 1997, most foreign branches of Thai banks were shuttered for good. “Thai banks still have bad memories about setting up international branch networks,” says one analyst.
For his part, Goto sees bright opportunities for Bank of Ayudhya to grow both in the Greater Mekong region and in the Thai domestic market. The bank has set a loan growth target of 9% for 2014.
To achieve that, Goto has said the priority will be to expand its corporate and SME business, maintain its leadership in consumer finance and build a solid deposit base “at optimal cost”. The bank also plans to increase corporate lending to Thai, Japanese and other multinational companies using the group’s global network and expertise.
That should be relatively easy. BTMU currently has a presence in 13 key Asia-Pacific markets including Cambodia, Myanmar, Vietnam, Malaysia, Singapore, Indonesia and the Philippines. Specifically, BAY will focus on supporting its clients’ expansion in the Greater Mekong region and expanding products and services to clients’ supply chains.
“We are preparing to grow in tandem with the rapid development of the CLM countries,” says Goto, referring to Cambodia, Laos and Myanmar.
Breaking into the top-four banks in Thailand could be much tougher. But with the support of one of the world’s largest banks, it is probably only a matter of time before BAY succeeds.
Smaller Thai banks may fare less well. While there will always be a place for well-managed niche players that focus on areas such as leasing, small and medium-sized enterprises or mortgage lending, their numbers are likely to dwindle in the face of fierce competition. The eventual liberalisation of financial services under the Asean Banking Integration Framework is likely to accelerate the process.