Thai banks' NPL risk to gradually improve by end-2017

Overall credit costs will still be high but will eventually ease.

Overall loan growth should be sluggish in 3Q17 at around 1% qoq. UOB Kay Hian said that according the banks’ guidance, loan growth should see more improvement in 4Q17.

"We expect sector loan growth to be close to 5% this year," the analyst said.

Here's more from UOB Kay Hian:

NIM likely to have peaked but still resilient. With limited room for deposit costs to be re-priced downwards and the full-quarter impact of lending rate cut at the end of 2Q17, we expect NIM to have already peaked.

However, we do not expect a sharp deterioration in NIM trend. Sluggish loan demand and plentiful liquidity should allow banks to manage deposit flow (higher LDR) to support their NIM. We forecast NIM to remain reasonably resilient at 3.2% in 3Q17 (2Q17: 3.28%).

Fee income to remain weak. Against the backdrop of low interest rate environment, we expect the bancassurance business, which used to be key fee growth driver of banks, to continue to struggle while other fee income should remain under pressure from slowing economic activities. We forecast fee income growth of only low- to mid-single digit for the sector.

Higher NPLs expected. We expect NPLs balance to increase further with key area of deterioration to come from SME (commerce and agriculture-related sectors) and re-entry of NPLs, but this should not be a surprise.

However, with easing NPLs formation, we expect NPLs will have peaked within this year. Overall credit cost would still be high but should ease notably qoq to around 135bp as we believe credit should have already peaked in 2Q17 (169bp).