Asean-focused. Ex-Head of Thai Research

Athaporn Arayasantiparb, CFA

Asean (Thailand) Focused Independent Research

M Corp Review

M Corp is led by Athaporn Arayasantiparb who served as Head of Research for UOB and ANZ in Thailand and was an award-winning telecoms analyst at UBS in 2010 (AsiaMoney Thailand category) and Regional Strategist for DMG in Singapore. Prior to that, he also served as Kasikornbank credit analyst and scholar. He has a total work experience of 17 years, of which 14 were in research and 4 in research management roles. He started his career as an engineer for PTT and currently manages family investments. He holds an MBA from Stern (NYU) and CFA Charter since 2006. Apart from IPO Radar, which focuses on future listings, MCorp Review also provides six on-going thematic series ranked by frequency in descending order, namely: 1) Silicon Stories (technology) 2) Sathorn Series (financial services) 3) Thai-Coons (billionaire origin stories) 4) Reality Check (data-driven, investigative) 5) Thai Media Spotlight; and 6) Thai Macro Watch (global market drivers).

Thematic (Sector/Industry)

Brett King's bestseller Bank 4.0 highlights many important trends that could overturn conventional banking. In this review, we look at how some of them threaten Thai banks and how the banks adapt to these emerging changes. Here are some of the most important highlights:<ul>
<li>
Models that start from scratch. The First Principle highlights fintech business models that eliminate the need of certain facets such as physical branches, while conventional banks here have a tougher time downsizing to cope up with the trend.</li>
<li>
Rising regulatory costs and investments could end up crippling the Thai banks and putting them at a disadvantage to fintechs, but part of this burden will be up to the regulators themselves. Banking is labor-intensive, and there's a lot of good-paying jobs at risk if they make the wrong move.</li>
<li>
Encroachment by telcos. With banking expected to resemble technology platforms in the future, telecom operators who control such infrastructure could end up eating a big part of the banking business. Some very profitable services today such as wealth management will be more vulnerable than others.</li>
</ul>

Brett King's bestseller Bank 4.0 highlights many important trends that could overturn conventional banking. In this review, we look at how some of them threaten Thai banks and how the banks adapt to these emerging changes. Here are some of the most important highlights:

Models that start from scratch. The First Principle highlights fintech business models that eliminate the need of certain facets such as physical branches, while conventional banks here have a tougher time downsizing to cope up with the trend.

Rising regulatory costs and investments could end up crippling the Thai banks and putting them at a disadvantage to fintechs, but part of this burden will be up to the regulators themselves. Banking is labor-intensive, and there's a lot of good-paying jobs at risk if they make the wrong move.

Encroachment by telcos. With banking expected to resemble technology platforms in the future, telecom operators who control such infrastructure could end up eating a big part of the banking business. Some very profitable services today such as wealth management will be more vulnerable than others.


Nine Reasons Why Thai Banks Should Be Worry About in the Future

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Underweight <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank's (KBANK)</a> inaugural Additional Tier 1 (AT1) bond on franchise challenges and valuation. Although Thailand is a long-term Coronavirus vaccine recovery play, we believe that KBANK’s SME emphasis is a franchise challenge that may extend the bank’s recovery timeframe. At the same time, trading at only 33bps higher than <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank (BBLTB)</a> in Option Adjusted Spread terms, KBANK’s inaugural issue appears to be fully valued.Kasikornbank’s 5.275% coupon 2025 callable US$-AT1 bond was 3x over-subscribed with 25% of orders from outside Asia, according to Bloomberg. Asian investors were likely attracted by the coupon; however, we are not convinced they are prepared for a relatively higher risk outcome as the bond’s yield declines. As such, yield compression is likely to be capped. In addition to this technical trading aspect, we elaborate on what we like and dislike regarding the issuer and this security within this insight.  What we like:<ul>
<li>The 5+ percent coupon should attract investors searching for higher yielding product.</li>
<li>The relatively high coupon reset level at five-year US Treasuries plus 494 should enable call at first call date, absent considerable credit quality deterioration.</li>
<li>Lower lending concentrations than Bangkok Bank.</li>
<li>High net interest margins and fee income juice pre-provision revenue.</li>
<li>Highest buffers to minimum capital requirements amongst Thai banks.</li>
</ul>What we dislike:<ul>
<li>Thai bank AT1 is subject to tougher coupon payment requirements than in other countries.</li>
<li>Leadership in lending to small &amp; medium sized enterprises (SME) may result in higher loan restructuring needs in the COVID-19 operating environment.</li>
<li>Restructured loan recidivism is high and this is a primary risk to chronic COVID loan relief decay.</li>
<li>Net interest margin to be pressured from Bank of Thailand rate moves and programmes to lower interest rates on SME borrowers.</li>
<li>KBANK’s SME ecosystem is likely to be tested by fragile operating conditions in Thailand.</li>
</ul>Despite the challenges of operating an SME franchise during an economic crisis, KBANK achieved a relatively attractive coupon level in its inaugural AT1 bond. This bond may outperform the market over the very near term, due to global monetary accommodation that will push investors to this security and domestic loan forbearance measures that will mask the true financial condition of Thai banks for months. However, the market impact of these measures may diminish with time. As such, we are taking a longer-term view and believe that this security will underperform its peers. Taken together, we recommend that investors underweight KBANK’s AT1 bond given the franchise challenges that the firm faces and current valuation levels. Issued at T+494 and trading at around T+ 492, we suggest taking profits at T+540 and recommend a stop loss at T+440.

Underweight Kasikornbank's (KBANK) inaugural Additional Tier 1 (AT1) bond on franchise challenges and valuation. Although Thailand is a long-term Coronavirus vaccine recovery play, we believe that KBANK’s SME emphasis is a franchise challenge that may extend the bank’s recovery timeframe. At the same time, trading at only 33bps higher than Bangkok Bank (BBLTB) in Option Adjusted Spread terms, KBANK’s inaugural issue appears to be fully valued.Kasikornbank’s 5.275% coupon 2025 callable US$-AT1 bond was 3x over-subscribed with 25% of orders from outside Asia, according to Bloomberg. Asian investors were likely attracted by the coupon; however, we are not convinced they are prepared for a relatively higher risk outcome as the bond’s yield declines. As such, yield compression is likely to be capped. In addition to this technical trading aspect, we elaborate on what we like and dislike regarding the issuer and this security within this insight.  What we like:
The 5+ percent coupon should attract investors searching for higher yielding product.
The relatively high coupon reset level at five-year US Treasuries plus 494 should enable call at first call date, absent considerable credit quality deterioration.
Lower lending concentrations than Bangkok Bank.
High net interest margins and fee income juice pre-provision revenue.
Highest buffers to minimum capital requirements amongst Thai banks.
What we dislike:
Thai bank AT1 is subject to tougher coupon payment requirements than in other countries.
Leadership in lending to small &amp; medium sized enterprises (SME) may result in higher loan restructuring needs in the COVID-19 operating environment.
Restructured loan recidivism is high and this is a primary risk to chronic COVID loan relief decay.
Net interest margin to be pressured from Bank of Thailand rate moves and programmes to lower interest rates on SME borrowers.
KBANK’s SME ecosystem is likely to be tested by fragile operating conditions in Thailand.
Despite the challenges of operating an SME franchise during an economic crisis, KBANK achieved a relatively attractive coupon level in its inaugural AT1 bond. This bond may outperform the market over the very near term, due to global monetary accommodation that will push investors to this security and domestic loan forbearance measures that will mask the true financial condition of Thai banks for months. However, the market impact of these measures may diminish with time. As such, we are taking a longer-term view and believe that this security will underperform its peers. Taken together, we recommend that investors underweight KBANK’s AT1 bond given the franchise challenges that the firm faces and current valuation levels. Issued at T+494 and trading at around T+ 492, we suggest taking profits at T+540 and recommend a stop loss at T+440.

Kasikornbank’s Inaugural AT1 – Underweight on Franchise Challenges and Valuation

US high yield markets outperformed Asia’s as expectations of an eventual US stimulus package met hopes for a less contentious US election result as Joe Biden’s polling lead grew. The relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. We expect this decompression to end on a buy the rumour, sell the news, trade on prospects for a Democratic Party election sweep over the next few weeks.In rate markets, US Treasury curve steepening accelerated on continued improved risk sentiment and reflation expectations. Concurrently, President Trump’s vacillation between off, then on, economic stimulus talks were met with bewilderment, if not outright health concerns.  Short-term interest rate futures spiked upwards as the news of President Trumps COVID-19 diagnosis changed election outcome projections and prospects of eventual federal stimulus pushed rate expectations even higher. In US equity markets, futures on the Chicago Board of Options Exchange Volatility Index (VIX) and spot VIX Index levels fell on lower perceived downside risks and higher expectations of a less contentious election result.Emerging market capital inflows rebounded strongly during the week as US dollar weakness returned. Over the near term, the more certain the market is of an uncontested election outcome, the greater the potential for US dollar weakness on concerns that more fiscal spending will widen U.S. trade and budget deficits.Meanwhile, Asia bank credit investors favoured a mix of high quality and higher yield Additional Tier 1 (AT1) and subordinated debt, in-line with the tepid increase in Asia’s risk sentiment. As the week closed, the Reserve Bank of India announced additional unconventional monetary policy stimulus measures aimed at improving credit transmission via the local bond market. This should benefit the more active debt capital market participants.Concurrently, only US$5.6 billion was raised by financial institutions in USD and Euros in the form of Senior HoldCo, Senior Non-preferred and AT1 bonds. Amongst Asia-headquartered banks, <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank (KBANK TB)</a> issued an AT1 bond, following the successful placement two weeks ago by <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank (BBL TB)</a>. We anticipate additional AT1 issuance by Thai-headquartered banks due to their capital stack needs. For more on this and the unique challenges of these banks, please see <a href="https://www.smartkarma.com/insights/thai-bank-capital-constraints-debt-capital-issuance-needs-and-potential-impacts" target="_blank" data-smartkarma-citation="insights:43884" rel="noopener">Thai Bank Capital Constraints and Debt Issuance Needs</a> as well as <a href="https://www.smartkarma.com/insights/thai-bank-capital-and-chronic-covid-19-sensitivity" target="_blank" data-smartkarma-citation="insights:44011" rel="noopener">Thai Bank Capital and Chronic COVID-19 Sensitivity</a>.  Looking forward, China is reported to be considering the issuance of an offshore US$-bond for the fourth straight year. The transaction could occur in the next week. Market Outlook A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, equity volatility,  interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

US high yield markets outperformed Asia’s as expectations of an eventual US stimulus package met hopes for a less contentious US election result as Joe Biden’s polling lead grew. The relative outperformance of the US versus Asia resulted in continued high yield index spread decompression. We expect this decompression to end on a buy the rumour, sell the news, trade on prospects for a Democratic Party election sweep over the next few weeks.In rate markets, US Treasury curve steepening accelerated on continued improved risk sentiment and reflation expectations. Concurrently, President Trump’s vacillation between off, then on, economic stimulus talks were met with bewilderment, if not outright health concerns.  Short-term interest rate futures spiked upwards as the news of President Trumps COVID-19 diagnosis changed election outcome projections and prospects of eventual federal stimulus pushed rate expectations even higher. In US equity markets, futures on the Chicago Board of Options Exchange Volatility Index (VIX) and spot VIX Index levels fell on lower perceived downside risks and higher expectations of a less contentious election result.Emerging market capital inflows rebounded strongly during the week as US dollar weakness returned. Over the near term, the more certain the market is of an uncontested election outcome, the greater the potential for US dollar weakness on concerns that more fiscal spending will widen U.S. trade and budget deficits.Meanwhile, Asia bank credit investors favoured a mix of high quality and higher yield Additional Tier 1 (AT1) and subordinated debt, in-line with the tepid increase in Asia’s risk sentiment. As the week closed, the Reserve Bank of India announced additional unconventional monetary policy stimulus measures aimed at improving credit transmission via the local bond market. This should benefit the more active debt capital market participants.Concurrently, only US$5.6 billion was raised by financial institutions in USD and Euros in the form of Senior HoldCo, Senior Non-preferred and AT1 bonds. Amongst Asia-headquartered banks, Kasikornbank (KBANK TB) issued an AT1 bond, following the successful placement two weeks ago by Bangkok Bank (BBL TB). We anticipate additional AT1 issuance by Thai-headquartered banks due to their capital stack needs. For more on this and the unique challenges of these banks, please see Thai Bank Capital Constraints and Debt Issuance Needs as well as Thai Bank Capital and Chronic COVID-19 Sensitivity.  Looking forward, China is reported to be considering the issuance of an offshore US$-bond for the fourth straight year. The transaction could occur in the next week. Market Outlook A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly. However, a rise in long-term rates may be tempered by the return of US Treasuries as a favored carry-trade option and by more targeted Federal Reserve asset purchase program operations.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, equity volatility,  interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Bank Credit Weekly: Risk-On as US Election and Stimulus Outlooks Sharpen

Jump to default risk may eventually increase at Thailand-headquartered banks if COVID-19 loan relief decay becomes chronic. We would like to hope for the best, but we recommend being prepared for the worst which is that a hardcore element of COVID-19 relief may never be repaid. This is not priced in the market, and may not be for some time; however, we think it better to invest with one’s eyes wide open.Given the size of COVID-19 assistance granted by banks in Thailand, loss given default amongst the COVID-19 loan relief cohort need only be a fraction of the total receiving relief in order for Thai bank capital buffers to be depleted. At the same time, losses on currently reported nonperforming assets (NPAs) need to be substantial to impact current capital levels. However, currently reported NPA ratios offer no line of sight on possible future COVID-19 related losses which could impact optional capital distributions, such as dividends and Additional Tier 1 coupons.Although there may be a considerable amount of time available for Thai banks to ‘earn’ their way out of this crisis, a slowdown or downturn in the Thai or global economy could result in a material increase in the number of failed loan restructurings and a corresponding increase in losses. In the intervening time-period, bank performance measures are unlikely to reflect the real economic strength of Thai-headquartered financial institutions due to the accounting treatment of COVID-19 assistance provided. As a result, Thai bank classifications and provisioning may be less stringent than those applicable to banks in the US and other countries. Meanwhile, Thai banks face both a net profit and a capital buffer test towards determining their ability to make optional capital distribution payments. Please see the companion report to this insight, <a href="https://www.smartkarma.com/insights/thai-bank-capital-constraints-debt-capital-issuance-needs-and-potential-impacts" target="_blank" data-smartkarma-citation="insights:43884" rel="noopener">Thai Bank Capital Constraints</a>, for details regarding currently constraining capital buffer levels. In this note, we focus on the sensitivity of each banks’ constraining capital buffer to borrowers receiving COVID-19 loan relief.

Jump to default risk may eventually increase at Thailand-headquartered banks if COVID-19 loan relief decay becomes chronic. We would like to hope for the best, but we recommend being prepared for the worst which is that a hardcore element of COVID-19 relief may never be repaid. This is not priced in the market, and may not be for some time; however, we think it better to invest with one’s eyes wide open.Given the size of COVID-19 assistance granted by banks in Thailand, loss given default amongst the COVID-19 loan relief cohort need only be a fraction of the total receiving relief in order for Thai bank capital buffers to be depleted. At the same time, losses on currently reported nonperforming assets (NPAs) need to be substantial to impact current capital levels. However, currently reported NPA ratios offer no line of sight on possible future COVID-19 related losses which could impact optional capital distributions, such as dividends and Additional Tier 1 coupons.Although there may be a considerable amount of time available for Thai banks to ‘earn’ their way out of this crisis, a slowdown or downturn in the Thai or global economy could result in a material increase in the number of failed loan restructurings and a corresponding increase in losses. In the intervening time-period, bank performance measures are unlikely to reflect the real economic strength of Thai-headquartered financial institutions due to the accounting treatment of COVID-19 assistance provided. As a result, Thai bank classifications and provisioning may be less stringent than those applicable to banks in the US and other countries. Meanwhile, Thai banks face both a net profit and a capital buffer test towards determining their ability to make optional capital distribution payments. Please see the companion report to this insight, Thai Bank Capital Constraints, for details regarding currently constraining capital buffer levels. In this note, we focus on the sensitivity of each banks’ constraining capital buffer to borrowers receiving COVID-19 loan relief.  

Thai Bank Capital and Chronic COVID-19 Sensitivity

We believe that it would be beneficial for <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank PCL (KBANK)</a> and <a href="https://www.smartkarma.com/entities/tmb-bank-pcl" target="_blank" data-smartkarma-citation="entities:8090:1" rel="noopener">TMB Bank PCL (TMBTB)</a> to follow <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank's (BBLTB)</a> Additional Tier 1 (AT1) bond with similar issuance and for <a href="https://www.smartkarma.com/entities/siam-commercial-bank-pub-co" target="_blank" data-smartkarma-citation="entities:214:1" rel="noopener">Siam Commercial Bank (SCBTB)</a> to issue a Tier II note over the near term. Capital constraints at Thailand-headquartered banks are not Common Equity Tier 1 driven and they vary from bank to bank, unlike most banks globally. This has implications for debt capital market issuance by these institutions and this issuance may positively impact on outstanding securities.  This unique banking system attribute leads us to believe that we will see more AT1 and Tier II bonds issued by these institutions over the near term. As this issuance occurs, currently outstanding notes should benefit. Higher debt capital buffers should also benefit equity investors. It would be better to take advantage of currently low rates rather than risk not having market access when needed.The issuance of an AT1 bond by Kasikornbank would likely have a positive impact on its currently outstanding US$-denominated Tier II note. The additional layer of subordination is of value. We note that KBANK is engaged in investors calls regarding a possible AT1 bond. Concurrently, the issuance of another AT1 bond by TMB Bank could positively impact on its currently outstanding AT1 note. We explain the alchemy of this in <a href="https://www.smartkarma.com/insights/bank-credit-strategy-pre-positioning-for-at1-price-accretion" target="_blank" data-smartkarma-citation="insights:42050" rel="noopener">Bank Credit Strategy: Pre-Positioning for AT1 Price Accretion</a>.  Meanwhile, the 2029 maturity Senior Unsecured note of Siam Commercial may also be positively impacted by an increase in SCBTB’s Tier II layer.Thai banks face both a net profit and a capital buffer test towards determining their ability to make optional distribution payments, such as dividends, bonuses, and Additional Tier 1 coupons. The net profit test is relatively straightforward. Thai banks must report net profits as of the most recent year-end. The capital buffer test is less obvious and not highlighted by these banks in their presentations. Between the two, the net profit test is the more immediate constraint; however, the capital buffer test may determine near term debt capital needs. Certain Thai bank bonds look set for additional spread compression over the near term.

We believe that it would be beneficial for Kasikornbank PCL (KBANK) and TMB Bank PCL (TMBTB) to follow Bangkok Bank's (BBLTB) Additional Tier 1 (AT1) bond with similar issuance and for Siam Commercial Bank (SCBTB) to issue a Tier II note over the near term. Capital constraints at Thailand-headquartered banks are not Common Equity Tier 1 driven and they vary from bank to bank, unlike most banks globally. This has implications for debt capital market issuance by these institutions and this issuance may positively impact on outstanding securities.  This unique banking system attribute leads us to believe that we will see more AT1 and Tier II bonds issued by these institutions over the near term. As this issuance occurs, currently outstanding notes should benefit. Higher debt capital buffers should also benefit equity investors. It would be better to take advantage of currently low rates rather than risk not having market access when needed.The issuance of an AT1 bond by Kasikornbank would likely have a positive impact on its currently outstanding US$-denominated Tier II note. The additional layer of subordination is of value. We note that KBANK is engaged in investors calls regarding a possible AT1 bond. Concurrently, the issuance of another AT1 bond by TMB Bank could positively impact on its currently outstanding AT1 note. We explain the alchemy of this in Bank Credit Strategy: Pre-Positioning for AT1 Price Accretion.  Meanwhile, the 2029 maturity Senior Unsecured note of Siam Commercial may also be positively impacted by an increase in SCBTB’s Tier II layer.Thai banks face both a net profit and a capital buffer test towards determining their ability to make optional distribution payments, such as dividends, bonuses, and Additional Tier 1 coupons. The net profit test is relatively straightforward. Thai banks must report net profits as of the most recent year-end. The capital buffer test is less obvious and not highlighted by these banks in their presentations. Between the two, the net profit test is the more immediate constraint; however, the capital buffer test may determine near term debt capital needs. Certain Thai bank bonds look set for additional spread compression over the near term.

Thai Bank Capital Constraints, Debt Capital Issuance Needs, and Potential Impacts

Thailand

TMB Bank Public Company Limited provides a full range of banking and financial services. The Bank offers corporate and personal lending, retail and wholesale banking, international trade financing, and investment banking services to its customers throughout Thailand.  It also has branches in Hong Kong, Laos, and Cayman Island.

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TMB Bank PCL (TMB-R TB)

Nine Reasons Why Thai Banks Should Be Worry About in the Future

Brett King's bestseller sheds spotlight on one of the world's largest sector anywhere. Is the business model dead? Do regulators get it? Are you...

Athaporn Arayasantiparb, CFA

Kasikornbank’s Inaugural AT1 – Underweight on Franchise Challenges and Valuation

Underweight Kasikornbank’s inaugural Additional Tier 1 bond on franchise challenges and valuation. The bank's SME emphasis may extend its recovery...

Hank Calenti, CFA

Bank Credit Weekly: Risk-On as US Election and Stimulus Outlooks Sharpen

A concise must-read on US$-risk sentiment derived from equity markets, rates, issuance, dollar levels and capital flows to frame near term Asia...

Hank Calenti, CFA

Thai Bank Capital and Chronic COVID-19 Sensitivity

Jump to default risk may eventually increase at Thailand-headquartered banks if COVID-19 loan relief decay becomes chronic. We would like to hope...

Hank Calenti, CFA

Thai Bank Capital Constraints, Debt Capital Issuance Needs, and Potential Impacts

Capital constraints at Thailand-headquartered banks are not Common Equity Tier 1 driven and they vary from bank to bank, unlike most banks...

Hank Calenti, CFA

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