Outgoing Bank of Thailand boss wants banks to halt dividend payments to shareholders, a move that will not go down well on Thailand’s stock market next week. The instruction to the banks comes on the same day that the deputy governor outlined a range of concessions that the central bank is advising banks to make to borrowers including reduced interest on credit cards and loans as well as a systematic approach to allowing debtors, in good standing, repay loans on easier terms without penalty.
The outgoing Governor of the Bank of Thailand, Veerathai Santiprabhob, and another senior official took proactive steps on Friday to address fears of an erosion of the asset quality within the Thai banking sector as the impact of the Covid 19 economic lockdown appears to be broader and more damaging than initial estimates. The Bank of Thailand has instructed commercial banks under its supervision to take immediate steps to review and strengthen their balance sheets including a suspension of dividend payments in the light of the devastating economic downturn which has impacted businesses at all levels and households.
On Friday, a series of announcements by Thailand’s Bank of Thailand left no one in any doubt that the economic impact of the Covid 19 virus is still pending as the central bank instructed commercial banks to cease the payment of dividends and the buyback of bank shares.
On the same day, a senior official within the bank outlined a programme for financial institutions to ease payment terms and extend credit limits to compliant debtors from August 1st and into 2021.
Impact on individuals and businesses from Covid 19 shutdown has been heavy and pervasive
The impact of the Covid 19 pandemic and economic shutdown has been both deep and widespread. So said Bank of Thailand Governor Veerathai Santiprabhob on Friday.
He warned that the prolonged shutdown and economic effect, still negatively impacting the Thai economy, were causing financial damage to the balance sheets of companies and the personal finances of individuals within the kingdom.
Fears the downturn may have impinged on the quality of loan assets held by Thailand’s banks
He directly addressed the implications, in turn, for bank balance sheets. Before this pandemic, the bank had taken steps to strengthen the balance sheets of Thailand’s commercial financial institutions under its remit.
It had, however, consistently warned about rising household debt levels among consumers.
On Friday, the governor baldly took the issue in hand when he suggested that the shock downturn may have impinged on the quality of bank assets.
He urged the banks to look carefully at the position and address it.
‘The Bank of Thailand is telling commercial banks to come up with a plan on their capital ratio for the next one to three years, by taking into account economic trends and the potential of debtors to run their businesses in the post-Covid era,’ he said in a statement issued by the central bank in Bangkok.
Present Governor Veerathai Santiprabhob of the Bank of Thailand to step down at the end of September
The present Governor, Mr Veerathai, is to step down when his current 5-year term in office expires at the end of September. A shortlist of candidates to replace him is expected on July 2nd.
The bank boss is only 50 years old and is a graduate of Thammasat University and Harvard.
The governor had, earlier this year, told reporters he was stepping down due to family considerations.
Move is a sign that financial risk is rising in Thailand but this is true also for other countries
The announcement by the central bank governor on Friday must be seen in the context of similar requests from other central banks around the world to preserve financial stability during this apprehensive time.
A securities analyst in Bangkok, speaking to The Nation newspaper, squarely identified that the move is a sign that financial risks are on the rise as Thailand grapples with a world in economic turmoil and the sharp impact to its economy including a severe contraction in exports and the complete closure of the foreign tourism industry since early April.
‘Before novel coronavirus arrived, Thai banks were resilient with a solid capital base, but now we don’t know for sure. So far, we don’t know the reality of bad debts, as many debtors are being given the option of delaying their debt payments,’ Pipat Luengnaruemitchai, who is the Assistant Managing Director of Phatra Securities in Bangkok, said.
Firm predicts a 9% economic contraction in Thailand this year after a very disappointing 2019
He emphasised that his firm is predicting a hefty 9% contraction in the Thai economy for this year following a highly disappointing economic performance in 2019.
Thailand is also suffering from an unprecedented dose of unemployment. The latest figures show the country, which once had the lowest unemployment rate in the world, at under 1%, now registering a 10% unemployment rate.
‘We are pessimistic about the economic outlook as tourists have almost all gone, while consumption, investment and exports are all being impacted by the outbreak,’ Mr Pipat said.
Banks may so far be over-optimistic because of the historical performance of borrowers
Mr Pipat explained that the instruction to commercial banks not to buy back shares was a move intended to head off any efforts by them to circumvent the instructions regarding dividend payouts to stockholders.
The financial analyst pointed out that bank projections may easily appear inflated due to a false momentum before issues surrounding firms or individuals have yet to come to the fore.
This crisis has severely disrupted normal trade and patterns.
Mr Pipat foresaw financial markets in Bangkok reacting negatively to the move on Monday with a sell-off in bank shares.
Federation Industry boss calls for a boost to the automotive industry and an excise duty cut
The news comes as Supant Mongkolsuthree, the chairman of the Federation of Thai Industries is calling on the government to help bolster Thailand’s automotive industry which has seen a sharp fall in both domestic and export sales.
The body had reacted to a call for suggestions from interested parties on how Thailand should move forward economically from the pandemic emergency.
This call was made this week by Thai Prime Minister Prayut Chan ocha as the country contends with what is an economic disaster as well as so many other nations.
For the automotive industry, it has seen a reduction in output of over 40% this year so far. May’s domestic car sales alone were down by over 54%.
The industry body is suggesting again that the government should reduce excise charges on cars by 50% but the proposal has been consistently rejected by authorities because of the level the income generated, which amounts to ฿100 billion in badly needed income for the exchequer. Officials also argue that such a reduction would, overnight, lower the sale value of all cars on Thailand’s roads, such would be its significance.
Deputy Governor issues guidelines to banks urging a reduction in interest rates and easing of terms
Also, on Friday, in another initiative by the Bank of Thailand, the deputy governor for Financial Institutions introduced a comprehensive and broad range of guidelines for banks which would see a lowering of interest rates, an extension of credit lines to borrowers in good standing and a system or approach to be applied by financial institutions to allow borrowers to renegotiate the payment terms on loans to help them manage through this unprecedented crisis.
The bank expects to see such a new regime coming into effect on the 1st of August and being extended until the end of 2021.
Banks prohibited from raising excess charges or penalties on such concessions to customers
The guidelines issued to the financial institutions would also explicitly prohibit them from treating such arrangements as a default by the creditor or applying penalties or other expenses over the course of the newly agreed borrowing period.
The bank has also charged the financial institutions, under its supervision, to clearly explain and outline the terms of these arrangements to debtors.
Among the proposals is that interest rate charges are to be reduced by 2% to 4% on credit cards and personal loans while credit lines would be increased to reliable borrowers earning less than ฿30,000 per month.