Thai banking: Middleweight merger won’t make heavyweight hitter

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Plans to merge TMB Bank with Thanachart Bank have raised hopes of further consolidation, but it will take a lot more than that to shake up the sector and create champion banks to compete with regional leaders.

By Ben Davies

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News of a bank merger should send a frisson of excitement through Thai financial circles, heralding another step in the long-overdue consolidation of Thailand’s overcrowded banking sector.

Yet the announcement in August that seventh-largest lender TMB Bank has agreed to merge with middling Thanachart Bank in a deal worth Bt156 billion ($5.1 billion), while welcome, falls short of what this market really needs.

Ever since the 1997/98 Asian financial crisis, it has been clear that Thailand – and other markets in the region – would benefit from having fewer, but bigger banks, yet the country’s top-tier commercial banking groups are under no real pressure to pursue such action.

The TMB-Thanachart merger is the first substantial consolidation in the local banking sector in six years, and will be the second-largest M&A transaction in the history of Thai banking, after Bank of Tokyo Mitsubishi’s Bt170.6 billion acquisition of a 72% stake in Bank of Ayudhya.

The deal creates a lender with roughly 10 million customers, 19,000 employees and first half revenues of Bt39.5 billion. From the point of view of the regulator, it will reduce the number of commercial banks from 14 to 13 and in theory pave the way for a new force in Thai banking.

However, from a regional perspective, it will make very little impact.

Singapore’s DBS Bank dominates the fast-growing Asean region with total assets of $404 billion and a footprint across most of Asia. Malaysia’s Maybank ranks fourth with assets of $195 billion, but the best Thailand can do is Siam Commercial Bank, with assets of $97 billion, ranking seventh in the regional pecking order. So when it comes to supporting increasingly aggressive Thai companies in regional M&A or simply providing cost-efficient services to big corporate clients, Thai banks lack regional clout.


We do not see the TMB-Thanachart merger as being a significant deal for the Thai banking sector because both banks have a relatively small customer and deposit base 
 - Kongkiat Opaswongkarn, Asia Plus Group

The merged TMB-Thanachart bank will still only rank sixth in the local banking league, with combined assets, according to the latest financial data, of just under Bt2 trillion. That’s considerably less than the Bt3.26 trillion of market leader Siam Commercial Bank or the Bt3.14 trillion of Bangkok Bank, and hardly big enough to threaten Kasikornbank and Krung Thai Bank, which rank third and fourth respectively.

“We do not see the TMB-Thanachart merger as being a significant deal for the Thai banking sector because both banks have a relatively small customer and deposit base,” says Kongkiat Opaswongkarn, the veteran chief executive of securities house Asia Plus Group. “Will it change anything? It will not.”

Others are also lukewarm about the deal, and TMB’s share price has declined since the announcement.

“The nature of the TMB-Thanachart bank merger is strategically rational and it increases the size of the bank, which we think is a good thing,” says Parson Singha, senior director at Fitch Ratings in Bangkok.

“But it doesn’t necessarily create a major new competitor that will leave everyone quaking in their boots. This is just rearranging the dynamics that are already present in the banking sector.”

There are some obvious synergies, but these are of domestic interest.

Following the merger, the new consolidated bank will have a 31% market share of the hire-purchase business. It will rank fourth in mortgages with a 13% market share, and fifth in the fast-growing small and medium-sized enterprise sector with a 6.5% market share.

Certainly from the point of view of shareholder ING, which currently owns a 25% stake in TMB, the deal makes sense.

“We’ve had favourable results from our investment in TMB since 2008 and we are positive on the digital development in the country’s banking sector,” says Mark Newman, managing director, challenger and growth markets Asia at ING. “That is why we decided to additionally invest about Bt12.5 billion to support the merger.”

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Boosting competition

As recently as 18 months ago, the Thai government had grand plans for the banking sector. In March 2018, Apisak Tantivorawong, who was finance minister at the time, said Thailand needed to establish champion banks with the scale and international reach to compete with rival lending institutions across the region. Veerathai Santiprabhob, governor of the Bank of Thailand, agreed.

“Mergers will help in boosting competition among the commercial banks, enabling lower costs of financing and enhanced risk management with cheaper financing costs for the business sector,” Veerathai was quoted as saying in the local press.

To encourage local banks to merge, the Thai cabinet approved a raft of tax breaks and exemptions in April 2018. Under the new rules, effective until the end of 2022, merged banks with total assets of more than Bt4 trillion would be allowed to deduct double their expenditures from corporate income tax, while those with assets worth between Bt3 trillion and Bt4 trillion would be able to deduct up to 1.75 times. The sliding scale of tax deduction rates also applies to smaller players.

But there were no takers among the top-tier commercial banks, largely because Thailand’s biggest banks have dominant shareholders with long histories and distinct cultures.

Suchart Techaposai, head of Thailand research at CLSA, points to the differences.

“Bangkok Bank has a long family history,” he says, referring to the powerful Thai-Chinese Sophonpanich family that has controlled the bank for three generations since it was founded in 1944.

It’s a similar story at third-ranking Kasikornbank, controlled by the Lamsam family. Having battled their way through the Asian financial crisis, Suchart believes it is unlikely that either family would want to see their shareholdings diluted through a merger now.


For the big Thai family banks, the issue of mergers has nothing to do with financial resources or economic rationale. This is about culture and legacy
 - Therapong Vachirapong, Phatra Securities

Siam Commercial Bank is closely linked with the monarchy: King Maha Vajiralongkorn Phra Vajiraklaochaoyuhua of Thailand was listed as one of the principal shareholders of the bank in July, with a 23.5% stake.

Krung Thai Bank is 55% owned by the state’s Financial Institutions Development Fund and is frequently used as a tool of government policy.

“The big four local Thai banks can barely talk to each other, let alone agree on a merger,” explains one finance chief in Bangkok. “If there was going to be consolidation, it would have happened back in 1997 when some of the banks went through rough times. Now that they are well-capitalized [Bangkok Bank and Siam Commercial Bank have a capital adequacy ratio of 18.3% and 17.1% respectively], who would dare force them to merge?”

Others tend to agree.

“For the big Thai family banks, the issue of mergers has nothing to do with financial resources or economic rationale,” says Therapong Vachirapong, managing director and head of equity research at Phatra Securities. “This is about culture and legacy.”

He adds: “There is an argument that if you open up the Thai banking sector to greater competition, then the local banks will need to be stronger. But bigger banks don’t necessarily mean better banks.”

That explains why any focus on M&A will be among the smaller players.

“My personal view is that the ministry of finance and Bank of Thailand wanted the TMB-Thanachart merger to benefit from the tax incentives for bank mergers,” says Suchart. “This is not a real champion bank, but at least it combines two banks into one and lowers the number of commercial banks in Thailand, which is what the regulator wants to see.”

It also helps that the ministry of finance owns 25.9% of TMB Bank. “This merger is in line with the government’s policy to promote consolidation in the financial sector to enhance the scale and improve market position,” says Chumpol Rimsakorn, deputy permanent secretary at the ministry of finance.

Asiamoney repeatedly requested an interview with Piti Tantakasem, chief executive of TMB Bank, to talk about the deal but was told he was unavailable. In a press release dated August 9, Piti said: “Integration will furnish the new bank with enhanced capability to develop better products and services in the digital age.”

Slow pace

In recent years, there have been a few changes in Thai banking.

In 2017, Taiwan’s CTBC Financial Holding bought a 35.6% stake in LH Financial Group – the parent of LH Bank, one of the smallest players in the Thai commercial banking sector. And of course Bank of Tokyo Mitsubishi bought a majority stake in Bank of Ayudhya at the end of 2013.

But at Thailand’s central bank, there seems to be little concern about the slow pace of consolidation, or the number of financial players.

Thailand has 14 commercial banks, 11 foreign bank branches, 4 foreign bank subsidiaries and 8 specialized financial institutions.

“The number of banks operating in Thailand is not really our concern,” assistant governor Wajeetip Pongpech, who heads the Financial Institutions Policy Group at the Bank of Thailand, tells Asiamoney.

“After the 1997 financial crisis, there were too many financial institutions competing in the same market segments. Now we have a combination of universal banks and smaller niche players that compete in different market segments. I would say the situation is quite different.”

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Wajeetip Pongpech,
Bank of Thailand

Wajeetip is a cheerful Bank of Thailand veteran who joined the central bank in December 2001. She was senior director of the specialized financial institutions supervision and examination department until she was appointed to her new post in August 2018.

Given that Thai banks are dwarfed by regional heavyweights such as DBS or Maybank, shouldn’t the Bank of Thailand be doing more to encourage the sort of large-scale mergers that led to the formation of these formidable regional players?

Wajeetip nods her head.

“We provide incentives for financial institutions if they want to merge,” she says. “However, we don’t force them to take that route because it can be quite difficult and challenging to manage. Banks can choose to grow organically or seek a strategic partnership. M&A is just one of the paths.”

With Asean financial integration on the horizon, the environment for Thai banks could become much tougher. Under the Asean Banking Integration Framework (ABIF), drawn up in December 2014, qualified Asean banks should in theory be able to set up in neighbouring countries, injecting a shot of competition into the cosy local banking scene. However, like so many grand schemes, the reality is rather different, as Wajeetip understands only too well.

While talks have taken place between Thailand, Indonesia and Malaysia, a final workable game plan has yet to be agreed.

“We have concluded some agreements already,” Wajeetip says. “But we have to allow more time for countries to complete their own internal legal and parliamentary processes.”

As head of the financial institutions policy group, Wajeetip has other more pressing matters to tackle, such as making sure that local lenders remain strong in the face of an alarming build-up of household debt.

This hit a new high of 78.7% of GDP in March, up from 78.3% at the end of last year. Thailand now has the dubious distinction of having the second-highest household debt in the region after South Korea.

“This is an area where we would certainly like to see improvements,” says Wajeetip, adding that the Bank of Thailand has already handed out strong medicine, which might be tough for the banks but is intended to ensure long-term benefits to the economy.

The measures include a strict loan-to-value curb for new housing loans, introduced on April 1.


We provide incentives for financial institutions if they want to merge. However, we don’t force them to take that route. Banks can choose to grow organically or seek a strategic partnership 
 - Wajeetip Pongpech, Bank of Thailand

However, much of the risky lending comes not from commercial banks, but from smaller leasing companies, savings cooperatives and loan sharks, who operate outside the Bank of Thailand’s control.

“Nobody knows the real level of shadow banking in Thailand,” says Therapong. “It is very difficult getting the information. But in a nutshell, consumer debt is too high.”

Given Thailand’s rapidly ageing population, Therapong worries that there is no quick fix to the country’s relatively low level of economic growth (the latest World Bank estimate puts it at 3.5% this year).

The number of Thais aged over 65 is expected to reach 13.1 million, or 20% of the population by 2021, climbing to 17 million, or more than a quarter of the population, by 2040.

Wajeetip is also focused on the speed with which the broader financial landscape is changing.

“Competition is coming not only from foreign bank branches but in the form of credit companies and fintech companies,” she says.

“Thai commercial banks are trying to sharpen their competitive edge in the digital world. The competition is coming with or without our carefully designed policies. Every bank is now running,” she warns.

“We must prepare our banks and our households to become more agile and to build up a cushion to withstand all the shocks,” she continues. “We have to be ready for the next crisis, even if we don’t know where it will come from.”

Domestic protection

By some measures, Thai banks still look pretty healthy, though net interest margins, a key measure of profitability, have been on a downward trend for the last three years. However at about 3%, they are better than the 2.5% average in Malaysia and 1.5% average for banks in larger developed Asian economies.

“The eight banks under our coverage have not recorded an operating loss since 2002, except TMB in 2007, but that was due to impairment of its two subsidiaries, not from core operations,” notes Tanawat Ruenbanterng at Tisco Research in Bangkok.

Even in 2008, during the global financial crisis that sent many western banks to the edge (and Lehman Brothers over it), the eight largest Thai banks reported operating and net profit.

Of course, the main reason for this has been the high level of protection granted to domestic banks to ensure the stability of the banking system following the 1997 Asian meltdown, which started in Thailand.

Most foreign banks are limited to a maximum of one or two branches, meaning that they cannot rely on local deposits to fund their operations. This has constrained their ability to compete with domestic lenders on a level playing field, which in turn has meant little need for innovation at local banks.

“The Bank of Thailand will never deregulate the financial system here in the same way that you see in Europe or any other developed market,” says one foreign banker. “The reason they don’t want to do so is because they know that Thai banks would not be able to compete.”

Widespread public opposition to branch closures and layoffs means that even if banks do merge, it is hard to maximize value through restructuring and rationalization.

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Kongkiat Opaswongkarn,
Asia Plus Group 

“We all know that if banks merge, they will need to shed the number of employees, close down many branches and restructure operations,” says Kongkiat at Asia Plus Group.

“In the West, this is acceptable,” he adds. “But in Thailand, very few people want to get their hands dirty. It’s the culture.”

Fitch’s Singha argues: “I do think this worry about bank profitability is in a way slightly overblown.

“Yes, the oligopolistic structure does support earnings through the cycles, but in the long run it is good for the health of the financial sector as it enables the banks to build up their capital and their profits.”

Singha also points out that “one of the challenges for the central bank is that some of their goals may actually conflict with one another. Should there be consolidation in the banking sector to create, say, three big Thai banks that can compete with large foreign banks from Singapore or Malaysia? Perhaps the answer is yes. But if there were only three large banks in this country, competition would probably decrease not increase.”

There is also the issue of whether having a smaller number of banks would better serve the interests of customers in remote parts of the country where banking is marginally profitable at best.

Overall, further consolidation is unlikely to take place soon.

“After the TMB Bank-Thanachart merger, I think we will have to wait at least another five years before we see any more bank merger activity,” predicts Kongkiat. “The big banks like Siam Commercial Bank and Kasikornbank are too busy focusing on digital transformation to pay much attention to mergers.”

All the biggest lenders have invested heavily in new digital platforms in recent years. SCB’s digital transformation programme has a price tag conservatively put at Bt40 billion. Top-tier firms such as SCB, Kasikorn and Bangkok Bank can more easily afford the large digital investments necessary to maintain their competitive advantage, whereas smaller local banks simply don’t have the financial muscle to do so, making them attractive prey for larger lenders.

“The drive for profitability and efficiency, combined with the fact that people do business in a more IT-oriented way, will spur the process of mergers in the longer term,” says Kongkiat. “If customers don’t contact their branch managers, banks will shut down more and more of their branch network. This is a global trend, and it is difficult to resist a global trend.”

Small and medium-sized lenders could become takeover or merger targets, for example Tisco Bank, a well-managed niche player that specializes in hire purchase and leasing, and Kiatnakin Bank, part of the Kiatnakin-Phatra financial group, which is widely respected for its strength in the capital market business.

CLSA’s Suchart cites Weerapat Wonk-urai, senior bank analyst at the firm, who says that a merger between Tisco Bank and Kiatnakin would certainly benefit both parties, given their complementary businesses: “Tisco and Kiatnakin are small banks. They focus mainly on auto lending. If they were to merge, this would create economies of scale and lower operating expenses whilst allowing Kiatnakin to cross-sell wealth management products to Tisco’s customer base.”

For TMB-Thanachart, there are still a few hurdles that will need to be cleared before the deal goes through. As of the end of August, a non-binding agreement to merge had been signed off by each bank’s board of directors. Both banks will hold an extraordinary general meeting on September 23 to seek shareholders’ approval, after which the next step will be to seek approval from the Bank of Thailand.

“I don’t see any obstacles to the merger from our side, but I can’t discuss the situation of the individual banks,” says Wajeetip at the Bank of Thailand. “We need to see the merging plan and the building blocks of the plan and we need to give our approval. So that is the process that is going to happen.”

Once the regulator has signed off on the deal, Thanachart Bank will be required to sell all its subsidiaries with the exception of Thanachart Fund Management and Thanachart Broker in which the bank holds 75% and 100% stakes respectively.

The sale of these subsidiaries is expected to raise Bt26 billion. TMB will need to raise an additional Bt130 billion through a mixture of debt and equity to fund the purchase of Thanachart Bank.

The merger is expected to sail through the approval process, not least because the authorities have invested too much time and face for it to be derailed.

“There has already been too much back-slapping to call it off,” says one investment banker.