According to research from Morgan Stanley, Thai banks are currently facing challenges with the lowest Return on Equity (RoE) in ASEAN banking alongside dividend yields that are only mid-range for the sector. The firm suggests that investors seeking exposure may find value in Bangkok Bank (SET: BBL) and Kasikornbank (SET: KBANK), both of which are rated as Overweight (OW) by Morgan Stanley.
“We see little need to be in Thailand banks,” Morgan Stanley wrote.
Following the fourth quarter of 2024, revisions in estimates for Thai banks have been varied and specific to individual financial institutions. Morgan Stanley projects a 20 basis points decline in the combined RoE of Thai banks to 8.9% in 2025.
This decrease is attributed to the anticipation of reduced Net Interest Income (NII) due to subdued loan growth and narrowing Net Interest Margin (NIM) fueled by declining interest rates. Despite these challenges, fee recovery, cost management, and the ongoing normalization of credit expenses are expected to mitigate the impact on RoE.
Despite foreign investment initially boosting Thai banks’ valuations in August 2024, subsequent net selling activities have dampened the sector’s performance. Notably, Bangkok Bank and Kasikornbank, offering dividend yields of 6% and 5% respectively, have lagged behind peers in terms of performance and are trading at lower Price-to-Earnings Ratio (PER) levels. Morgan Stanley foresees that these two banks will experience notable earnings growth in 2025, ranking behind only TMB Thanachart Bank, primarily driven by the normalization of credit costs.
With concerns about the sustainability of balance sheet expansion, Morgan Stanley questions the efficacy of wealth management services in revitalizing Thai banks. While short-term benefits from increased wealth product adoption among existing clients are acknowledged, long-term structural challenges loom large.
As interest rate decreases prompt a shift from deposits to investments, the decline in the proportion of deposits relative to GDP in Thailand presents a significant hurdle for the banking sector.
Moreover, factors such as aging demographics and insufficient pension coverage are anticipated to constrain growth prospects. Despite these challenges, Morgan Stanley predicts high single-digit fee growth for Thai banks, mainly driven by the expansion of wealth management services.
