Thai banks' new NPL formation falls for the first time in five years

It slipped 4% to ~USD1.2bn in 2Q16.

Maybank Kim Eng has been saying since early this year that NPLs should peak in 2Q16 due to the slowdown in the new NPL formation component, which is the largest component in the change of gross NPLs outstanding each quarter.

According to the analyst's study that forms the basis of its thesis, there are three indicators that have predictive power for future new NPL formation one to three quarters ahead. These are: 1) the growth rate of GDP; 2) the policy rate as a proxy for domestic interest rates; and 3) consumer inflation. The improvement in macroeconomic conditions since late 2015 suggested that new NPL formation should soon slow.

"In fact, new NPL formation has slowed, falling for the first time in five years during 2Q16by 4% YoY (-5% QoQ) to THB44.9b. The improvement (slow/stabilizing) was broad-based, but clearly visible in the real estate and financial sectors, which saw new NPL formation fall on both a QoQ and YoY basis."

"However, the NPL re-entry, another component for the increasing NPLs, rose by 10% YoY in 2Q16, mostly due to the acceleration of the real estate sector. The rise, perhaps, was due to a few developers as the loan size ticket in this segment is typically large. Hence, the jump in this category does not suggest weakness across the industry, and we believe it should disappear going forward, especially in light of improving macroeconomic conditions," adds Maybank Kim Eng.