The traffic may have eased a little in Bangkok since the crash, but there is still gridlock in Thailand’s banking system.
The banks are stuck with a mountain of non-performing loans they would dearly love to offload, and there are plenty of buyers prepared to snap up bargains at attractive discounts.
The problem, as ever, is price.
DBS Thai Danu Bank recently offloaded distressed assets with a nominal value of Bt31 billion ($756 million), selling them for a mere Bt8 billion – a 74% discount to face value. The deal was heralded by Bangkok analysts as a useful benchmark to the real state of the industry’s NPLs, on which the Bank of Thailand’s detailed statistics have been plentiful but increasingly meaningless, as notional restructurings and off-balance sheet manoeuvrings bring headline figures down, while underlying problems remain. NPLs were forecast by the government to fall below 20% by the year-end, against 31% at the end of August.
“The NPL Figures published are just an accounting facade. If you look at the real stuff, nothing has changed,” says Wapan Wongpanit, head of research at SCB Securities.
On the face of it, Thailand should have all the makings of a thriving market in distressed debt, but things are not that simple, as the Thai Danu Bank deal demonstrated.
The discounts at which NPLs are valued by the market are far higher than the provisions banks have made for non-performance. Hence for every Bt100 of debt banks clear off their books, they take a 74% notional loss, but, in TDB’s case, its “full” provisioning only amounted to 60% of its portfolio. In other words, the more NPLs a bank sells the greater loss it must absorb over and above existing provisions.
With many Thai banks short of capital, and the lacklustre stock market making new capital issues all but impossible, that means banks are between a rock and a hard place.
Siam Commercial Bank is widely believed to be the strongest of the commercial banks and in reasonable shape, but the others are not considered to have sufficient capital to absorb further losses.
Thai Danu was only able to make the move it did thanks to the backing of new parent DBS Bank of Singapore. Other banks have less robust shareholder support.
“One of the challenges that private banks face is the decision whether to sell assets today at market prices which are obviously depressed, says Shane Gunther, head of research at UBS Warburg. “The alternative is to try to work them out and ultimately get 40 to 60 cents.
“There is a cost to that. If you do have the capital you can take the hit today and restore profitability very quickly.”
Another solution would be for the government to set up a national asset management corporation to take on NPLs. With an election scheduled for some time in the next three months, and another three months likely to be needed to sort out coalition positions, a package is unlikely soon.
The government could buy at, say, 50 cents on the dollar, and sell at 25 cents and effectively make the market, suggests Gunther, who believes that the government was in a strong enough Financial position to do that on the assumption that 5% to 6 % GDP growth in coming years would offset any increase in government debt required.
“You could ‘growth’ your way out of the problem quite easily,” he says. “If the government was aggressive enough to do it, it would have no problem.”
Nevertheless, many of the larger banks are showing signs of recovery and are profitable at a pre-provisioning operating level, which means that gradually they will be able to top up capital from earnings anyway.
On the demand side for these portfolios of distressed debt stands a raft of big name international Firms that reckon they can make money in the long term.
“To some degree it is a warrant on the economic recovery of Thailand,” says Gunther. “Is there a lot of foreign interest? Yes, at the right price.”
Goldman Sachs, GE Capital, Lehman Brothers and Morgan Stanley have all taken positions in the secondary debt market, either buying through the Bank of Thailand’s Financial Restructuring Authority auctions earlier in the crisis, or buying out restructured debt on a company-by-company basis.
Locally, better-capitalized National Finance, along with Lehman’s unit Global Thai, took on the TDB loans. But the domestic Firms don’t have sufficient resources to absorb all the bank NPLs, which are Bt170 billion for Bangkok Bank alone.
The rock-bottom prices might look tempting, but what of potential recovery levels?
“It’s a gamble, there’s no question,” says Gunther. “This is high risk and potentially high-yielding debt. They will get zero from some, and 100% from others. It’s a bit of a crapshoot.”
Current NPL recovery rates are being obscured by relapse rates and the variable quality of restructurings. Larger corporates are tending to show lower relapse rates, perhaps because of the time and effort spent on renegotiation – three years in the case of the largest debtor, Thai Petrochemical Industries, for example.
The picture is more hazy for smaller and medium-size companies, where Band-aid solutions have often resulted in simply 12-month moratoria. Thai Farmers Bank, which is more exposed to that sector has seen relapse rates rise from 15% to 19%, while Bangkok Bank’s exposure to the larger borrowers has resulted in a relapse rate of less than 3%, says Gunther.
Wapan is also pessimistic about prospects for debt recovery. “When Thailand was hot everyone was willing to lend these companies money more and more, and these guys started to get big-headed,” he says. “When the bubble burst they found themselves with plans to build all this spare capacity and no demand. The economic feasibility of the country was as poorly as it is now.”
He continues: “I do not think they are going to be recoverable. Those companies taking these loans at that price probably think it is recoverable. Even at that price, if DBS thought they were recoverable they would not have sold them. It remains to be seen who ends up the laughing stock.”
Adisak Kammool, banking analyst at Phillip Securities, is more optimistic: “definitely they will make profits out of the assets they bought, but it will take time. In the next Five years they will probably make 100 % returns. The First few years should be quite good for the bottom line as they will cash in the good assets First, then it depends on the market situation and market recovery.”
Wapan adds: “We need a short sharp shock; another crisis. Reality has not really checked in yet. Everyone still thinks the economy is recovering Fine and it’s going to be a bed of roses from now on. Not much has changed except sentiment.”
