SCB becomes Finance Ministry's pet student
Thanong Khanthong and Vatchara Charoonsantikul say that unlike Siam Commercial Bank, other big banks are still opposed to letting go of their management and extending new credit.
Thailand is as much a good student of the International Monetary Fund as the Siam Commercial Bank is of the Finance Ministry.
Tuesday Dr Olarn Chaipravat, SCB president and CEO, said the bank would be seeking at least Bt22 billion from the Finance Ministry's Aug 14 banking-restructuring scheme to strengthen its tier-1 capital. This amounts to an admission that bank has finally arrived at the end game and that its only possible next move is to seek official help, which may semi-nationalise it.
Despite its limited resources, SCB has been trying its best to fulfil the government's policy directives. It is the only bank still lending money, albeit mostly housing loans, into an economy expected to contract by 7 to 8 per cent this year. The others in the banking system have been downsizing amid the pressure for higher provisions. In September 1998 SCB's credit growth stood at Bt5.62 billion, up 1.10 per cent on a year-on-year basis. In the same period Bangkok Bank and Thai Farmers Bank saw their credit contract by 8.59 per cent and 10.46 per cent respectively.
Olarn was not talking about small money. He said if SCB could muster financing worth Bt22 billion from the government's Aug 14 restructuring package, its tier-1 capital, the core capital which consists mainly of equity and retained earnings, would stand at 6.5 per cent, against the minimum adjusted regulatory requirement of 4.25 per cent. This official money will catapult the Finance Ministry into becoming a 40-per-cent shareholder of SCB overnight.
SCB's tier-1 capital amounts to Bt37 billion, but tough banking regulations require 100-per-cent provisions for loan losses, which makes it necessary for the bank to set aside Bt50.44 billion. Since the bank has already set aside Bt28.5 billion in provisions, it will need Bt22 billion from official money.
Clearly Finance Minister Tarrin Nimmanahaeminda would like to see SCB become a role model of government intervention in a Thai-style approach to tackling the banking crisis. His ultimate objective is to lead the Thai economy out of the recession. The target for next year's economic growth has been set at 1 per cent, but this recovery, apart from external factors, hinges significantly on bank recapitalisation, corporate debt restructuring and a resumption of bank lending. Without fresh credit, recovery will be out of the question.
That was why M R Chatu Mongol Sonakul, Bank of Thailand governor, summoned bankers to the central bank headquarters Tuesday to talk about recapitalisation. The government's assumption is that for the economy to recover by 1 per cent next year, total bank credit in the system will have to grow by 4 to 8 per cent. Over the next two weeks the banks are required to submit their credit extension, corporate-debt restructuring and recapitalisation plans to the central bank so that the overall target for credit growth can be met next year.
Still, Olarn said that for SCB to achieve a comfortable level in extending credit it needed Bt40 billion in official money for recapitalisation. This will raise its capital adequacy ratio to 11 per cent, well above the Bank for International Settlements' standard of 8.5 per cent.
With forthcoming official money, Olarn's future looks bleak, since part of the Aug 14 restructuring scheme's conditions give the government a say in changing the management should the bank seek official help in the tier-1 recapitalisation scheme. The package also lays down that capital be written down to clean up part of the bad debts so that fresh tier-1 capital can be tapped. However, SCB said Tuesday that it did not need to write down the capital because as soon as it participates in the Aug 14 restructuring scheme it will have enough money from its core capital to meet the provisions.
However, there are rumours about Olarn resigning once SCB has been rescued, while bankers are asking the government to relax this unpleasant condition. The past months have seen an increasingly visible role of Chumpol na Lamlieng, president of Siam Cement Plc, at SCB. Chumpol is helping SCB deal with its problem loans and reorganisation. As with Nukul Prachuabmoh, former governor of the Bank of Thailand, under Chumpol's management policies are formulated and the desk is kept clean. ''It is said that he goes home with bags full of documents which are all SCB's, not Siam Cement's,'' a banker said jokingly.
Other big banks say participation in the restructuring scheme would be the last resort, even though some have arrived at the same end game as SCB. Bank of Ayudhya asserted Tuesday that it would not need to sign a memorandum of understanding with banking regulators on its recapitalisation plan. Prapaisit Tankeyoon, the bank's managing director, said that following BAY's recapitalisation of core capital by Bt5 billion in June and its issuance of subordinated debt amounting to Bt8 billion in November this year it would have a capital-adequacy ratio of 11 per cent. Prapaisit did not provide the bank's non-performing-loan (NPL) level.
Bangkok Bank and Thai Farmers Bank will be the two survivors. Last week BBL president Chartsiri Sophonpanich tried to boost the morale of the bank's staff by calling for contributions and cooperation in helping the bank weather the crisis next year. There was no indication that the Sophonpanich family was ready to surrender in the fight to retain management control.
''BBL will only seek tier-1 money as a last resort. That is the impression I got from Khun Chatri [Sophonpanich, BBl chairman]. He does not give up easily,'' an analyst said.
Recently Chatri indicated that Chartsiri, his son, was mature enough to lead the bank through this crisis. Based on three key factors, Chatri is betting that BBL will be able to ride it out unscathed. Firstly, BBL's Bt40 billion in recapitalisation in April this year will help the bank set aside adequate provisions. Secondly, there will be enough to carry the bank through next year. Thirdly, the bank will resort to downsizing by refraining from extending any loans. Instead it will focus on transforming NPLs into good loans.
As of September this year BBL's lending growth had dropped to Bt84.78 billion or 8.59 per cent on a year-on-year basis, suggesting that it was not expanding its risk assets. BBL's reversal of its credit policy is giving Tarrin a tough time because if the biggest bank does not lend, the banking system will continue weak.
The banking analyst said Chatri expected BBL's NPLs, estimated at 36 per cent, to peak at 40 per cent in the second quarter of next year. If the economy recovers by then and NPLs are stabilised, BBL will survive this ordeal. Still, by 2000 BBL will not be able to avoid another round of recapitalisation, but by then it will be easier to sell the bank's stocks at better terms.
Morgan Stanley Dean Witter has forecast that BBL's adjusted book value in 12 months will stand at Bt30 per share, anticipating an erosion in the bank's equity base bringing it down to Bt46 billion from the current Bt122.7 billion.
If NPLs are to rise beyond 40 to 50 per cent, then BBL will also be nationalised. Banthoon Lamsam, president of Thai Farmers Bank, is also weighing the scenario cautiously. He recently testified to a House committee that if NPLs shot up to 60 per cent all banks would automatically be nationalised.
TFB, which raised Bt36 billion in March this year, is seen as having the same chance of survival as BBL. Morgan Stanley Dean Witter said it expected TFB's adjusted book value to stand at Bt26 a share over the next 12 months, assuming a sharp erosion of its equity base to around Bt30 billion from Bt68 billion and a build-up of provisions to a 40-per-cent level.
Both TFB and BBL are playing a high-stake game. They have brought their prime rates down to 11.50 from 15 to 16 per cent in hopes that this will help improve the overall creditworthiness of good customers and reduce NPLs and thus offset their narrowed profit margins. Only TFB is reported to have been posting a positive net interest margin, while the rest, including BBL, are in negative territory.
Until banks do raise capital, the banking system is still in danger of insolvency.