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.