Big Thai banks overwhelmed by flight to quality

Big Thai banks overwhelmed by flight to quality

BANGKOK (AFP): Major Thai commercial banks are facing tough
capital management problems after a crisis of faith in the
country's smaller financial institutions caused a massive influx
of deposits, analysts said.

Four leading banks announced a lending rate hike of a half
point to one percentage point last week to ease the burden of
paying interest on swollen deposits after Thais shifted their
savings from finance firms and small banks, they said.

Sompoch Intranukul, senior executive vice president of
Thailand's fourth largest bank, Siam Commercial Bank plc, said
its deposits had rocketed up by 40 billion baht (US$1.13 billion)
in the past two months.

Roughly 60 percent of domestic savings was now deposited with
the large banks, 30 percent with foreign banks and only 10
percent with small and medium sized banks, Prime Finance and
Securities analyst Chetta Meemangkang said.

In better times, the smaller banks held around 30 percent of
deposits. Meanwhile, confidence in all but a few finance
companies has collapsed.

Of Thailand's 91 finance firms, 58 have been suspended by the
central bank -- victims of mismanaged lending during the boom
decade to 1995 that ran into a collapse in export growth, a
property glut, an economic slowdown and a quicksand pit of bad
debt.

Banks and finance firms are groaning under the weight of an
estimated one trillion baht ($28 billion) in non-performing
loans, and the figure is expected to climb before the economy
breaks out of the doldrums.

As fears mount that the list of financial institutions in
trouble could grow, depositors are seeking the relative security
of the big banks.

Analysts say the situation is complicated by higher loan-loss
provisions, the reluctance of banks to extend new credit to
struggling businesses in the current climate -- which limits the
risk of accumulating more bad debt but also earnings -- and the
flight of foreign capital.

Although increases in lending rates and outflows of foreign
funds are usually accompanied by climbing deposit rates, big
commercial banks will not be looking to increase the cost of
funds in the current squeeze, Chettha said.

"Deposit interest rates should increase but the cost of doing
it is holding the banks back," he said.

He forecast foreign capital outflows of 500 billion baht this
year -- 100 billion baht more than last year, when grave
uncertainties over the Thai economy emerged.

Foreign funds would not be returning in any quantity until the
baht stabilized, and this would not occur until significant
progress was made in the rehabilitation of the finance sector and
related political turmoil subsided, analysts said.

And those foreigners that did enter the fray would be
demanding a high risk premium, they added.

To cope with the cost of funds, four small and medium sized
Thai institutions have joined the majors in increasing their
minimum lending rates by between one quarter of a point and one
percentage point recently.

Last week's lending rates increase by the four big banks means
they charge prime customers between 14.25 and 15 percent annually
for loans and overdrafts.

Siam Commercial increased its lending rates last week because
of its the huge deposit interest rate burden, Sompoch said.
But he added that setting deposit rates was complicated by
competition among Thailand's 15 banks.

"It's very difficult to determine the fixed deposit interest
rate because it's subject to the uncertainties of the financial
market and the competition (between banks)," Sompoch said.

United Securities analyst Thong-glod Bsichaikul said while the
big banks were unlikely to increase deposit rates, smaller banks
may be forced to pay a premium to win back customers and restore
some of the liquidity lost in the recent crisis.

At the six biggest banks, the average three-month fixed
deposit rate now stands at 10-to-11.50 percent per annum, while
the small and medium sized commercial banks offer 11-to-13.5
percent.