Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the April 3, 2007 issue of the Bangkok Post.
By Frank Janik
Last month, we reported on the initial stages of International Accounting Standard 39 (IAS 39) compliance. Under the new requirements, banks will become increasingly vulnerable to changes in their non-performing loans (NPLs), and thus will be under pressure to better manage their NPL positions. These measures are in line with the Bank of Thailand's aim to reduce NPLs within the banking sector to 2% over the next 12 to 24 months.
As of Jan 1, 2007, the central bank also requires banks to report their net NPL figures (i.e. after deducting relevant reserves), as opposed to gross figures, as have been reported in the past. For example, in November 2006, the reported gross NPL figures indicated that 8.86% of commercial bank loans were classified as NPLs. Conversely, the number as at the end of February 2007 was 4.31% (net of applicable loan-loss reserves). While this will allow lower figures to be reported, it still does not change the overall NPL position of commercial banks, nor does it address how commercial banks can resolve their current NPL problems.
While the recent guidelines introduced by the central bank are designed to improve NPL management, and thereby reduce the amount of NPLs, it does not address how commercial banks can resolve their approximate 465 billion baht (according to central bank figures as of November 2006) of NPLs presently in the system.
Historically, the predominant method for dealing with NPLs has been via restructuring and returning to performing, or foreclosure and sale/transfer of ownership of underlying collateral (primarily real property) to the bank. While there have been many successful restructurings, the instance of repeat NPLs (i.e. failed restructurings and hence return to NPL status) has been steadily rising over the past several months.
This number has also been affected by the central bank conducting spot audits at commercial banks and deeming certain restructuring plans ''non-commercial'', and consequently downgrading these loans to NPL status. ''Non-commercial'' restructuring plans are primarily those with long grace periods and/or minimal interest payment requirements, and bullet repayments to satisfy outstanding principal due in several years.
As an alternative to restructuring, commercial banks continue to actively pursue foreclosure as a means of loan resolution. However, sale prices are often lower than expected. Despite the recovery of certain sectors of the property market, supporting property collateral often falls outside these sectors and therefore has yet to recover the initial price declines due to the economic problems in the late nineties.
As a result, most banks have opted to transfer ownership of the asset to themselves as a debt offset for sale at a later date when property prices have recovered. However, in many instances, prices have not recovered and commercial banks are now holding literally thousands of properties on their books.
As an additional measure to assist in the NPL and non-performing asset (NPA) cleanup, the central bank has mandated state-owned Asset Management Companies (AMCs), such as the Bangkok Commercial Asset Management Company (BAM), to buy NPLs and NPAs from commercial banks that meet certain criteria. Primarily, this is for banks with NPLs in the later stages of the foreclosure process, with underlying real property securing debt or NPAs.
A number of banks have subsequently sold NPAs to BAM, and BAM recently announced contracts to purchase 30 billion baht worth of NPAs from thirteen banks and three debt-management companies. The purchase prices reputedly ranged from 12% to 33% of the appraised values of the underlying collateral.
A number of banks have also recently established wholly owned AMCs and have transferred large amounts of NPLs and NPAs to these AMCs for workout. In addition, a number of private parties have established AMCs with the express purpose of buying NPLs and NPAs from banks. In this regard, an AMC enjoys certain advantages in purchasing NPLs over, say, a limited company, as there is a separate act governing the activities of AMCs. To date, there are 14 registered AMCs in Thailand. According to the central bank they have acquired approximately 58 billion baht worth of NPLs as of January 2007.
However, unlike its neighbouring Asian countries, such as the Philippines, Taiwan, China, India, and more recently Malaysia, commercial banks in Thailand have not generally looked to offload significant amounts of NPLs and NPAs to the ever-increasing number of investors who specialise in acquiring these types of assets from banks. So, while the central bank is placing ever-increasing pressure on banks to lower NPLs, it is questionable whether banks will be able to reduce them through workouts and transfers to wholly owned AMCs alone.
With NPL and NPA transaction activity dwindling in neighbouring Asian countries (as much of the NPL stock in these countries has been sold), and cash-rich investors eagerly seeking new opportunities, now might be the time for Thai banks to once again consider large-scale portfolio sales as a means of quickly reducing their NPLs and NPAs.
