The recent surprise rate cut by the Monetary Policy Committee (MPC) of 0.25 percentage points is poised to exert immediate pressure on the Net Interest Margins (NIMs) of Thai commercial banks. With calls for policy rate reductions echoing for an extended period, it is anticipated that banks will soon face the expectation to transmit lending rate cuts to borrowers.
KGI Securities research from their sensitivity analysis indicates that commercial banks are likely to face decisive decisions in response to the rate adjustment.
The securities firm noted that banks are anticipated to have several choices: i) implement a uniform reduction of 0.25 percentage points across all lending rates including MLR, MRR, and MOR, ii) selectively decrease certain lending rates by 0.25 percentage points, or iii) decrease lending rates by only 0.125 percentage points.
Should banks opt for an across-the-board 0.25 percentage point cut, KGI Securities projects a potential decline in NIMs by approximately 15-20 basis points in the fourth quarter of 2024. Notably, larger banks are foreseen to encounter more pressure compared to their smaller counterparts.
The research highlights that each 10 basis points drop in NIM could lead to a nearly 5% decline in earnings for Bangkok Bank (BBL), Krungthai Bank (KTB), and a 4% decrease for Kasikornbank (KBANK) and Siam Commercial Bank (SCB).
While the reduction in interest rates is expected to stimulate economic growth, providing banks with increased lending activities, the impact on NIMs would necessitate a strategic approach by banks to maintain profitability. KGI Securities suggests that to offset the NIM reduction, banks such as BBL and KTB would need to grow loans by 3%, whereas KBANK and SCB would need around 2% loan growth.
In contrast, smaller banks like TMB Thanachart Bank, Kiatnakin Phatra Bank, and Tisco Financial Group are likely to benefit from lower interest rates as reduced funding costs enhance their margins.
Additionally, non-banking companies are also anticipated to experience a positive impact from the lower interest rate environment. The reduced funding costs are expected to improve margins, facilitating increased lending activities amid improved economic conditions.
Still, KGI Securities notes that abnormalities in the bond market and concerns regarding debenture defaults, which had happened several times as of late, could impede the benefits of lower interest rates in the near term.
Despite this, the research firm rates non-bank entities as ‘Overweight,’ with SAWAD and TIDLOR standing out as top picks. For the banking sector, a ‘Neutral’ rating is assigned, with BBL, KTB, and TTB highlighted as top selections according to KGI Securities.
