Volatility spells investment losses for Thai non-bank financial firms

Higher NPLs and credit costs may set in once measures expire.

The severity of the economic slump will result in weaker performance for Thai non-bank financial institutions (NBFIs) over the credit cycle, according to a Fitch Ratings report.

Thai GDP is forecasted to shrink 5.1% this year, which would be the weakest level since the 1997 Asian financial crisis. In addition, securities firms face downside risks from frailties in local capital markets and investor sentiment, which will minimise revenue from investment banking and wealth management, the report said.

Extremely high levels of volatility could heighten the possibility of unexpected investment losses that will hurt the issuers’ balance sheets, S&P noted.

Consumer finance and leasing companies are also confronted with challenges particularly in asset quality due to the nimble operating environment. Whilst relief measures on loan classifications and debt moratoriums will delay realisation of credit losses, firms could encounter elevated non-performing loans and higher credit costs once the measures expire.

Moreover, turmoil in the bond market has increased funding risk, which leaves smaller financial firms exposed to extreme liquidity risks due to their lack of stable funding resources and maturity mismatches, the report said.

A significant decay in earnings-generating capacity of securities firms, with no room for recovery over the next one to two years and minimised buffers, would lead to a rating downgrade, S&P said. On the other hand, severe asset-quality weakness coupled with a failure to return to pre-pandemic financial benchmarks would spur a downgrade for consumer finance and leasing firms.

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