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Top Thai banks' earnings a sign of tough times for Southeast Asian lenders

Any opinions expressed in thispiece are those of the author and do not represent the views of S&P GlobalMarket Intelligence.

Thebiggest Thai lenders may have set the tone for this bank earningsseason in SoutheastAsia, with atheme that is becoming all too familiar — worseningasset quality in the face of cooling economic growth.

Thefour largest banks in Thailand were among the first in Asia to report resultsfor the three months to June.

Amongthem, the country's top lender by assets, Bangkok BankPCL,last week reported a10.8% year-over-year decline in net profit for the quarter, with an increase inloan losses and a higher nonperforming loan ratio. It was a similar story atthe other three companies, with Krung Thai Bank PCL being alone in overcoming worseasset quality metrics to improve earnings.

"Weexpect the Thai banking sector's NPLs to keep rising in 2016," Deepali Chhabria,an analyst at S&P Global Ratings, said in an email. "Thai banks'credit costs will remain high in 2016."

Thetrend may be echoed at their peers elsewhere in Southeast Asia, such asPT Bank Mandiri (Persero) Tbk,Indonesia's largest bank, and the top three lenders in Singapore, which arescheduled to report in the coming days.

Banksin the region are struggling to contain bad debt, as economic growth slows amidheadwinds ranging from a weakening China to low commodity prices. The WorldBank projects that economic expansion this year will decelerate or stall in 10of 14 developing countries in the East Asia and Pacific region, following alackluster 2015.

Suchdownbeat economic prospects mean worsening asset quality metrics could be a keyfeature of upcoming earnings releases from many Southeast Asian banks.

In keyemerging markets such as Indonesia, "borrowers are being squeezed by theeconomic slowdown and commodity crunch," said S&P Global Ratingsanalyst Ivan Tan.

Numbersfor last year showed growing stress in banking systems in major Southeast Asiannations.

InIndonesia, the largest ASEAN country by nominal GDP, the mean NPL ratio of thetop three lenders rose for two straight years to 1.84% at the end of 2015,while the figure in Thailand jumped to 3.32% from 2.62% over the 12 monthsthrough Dec. 31, 2015, accordingto SNL Financial data based on company disclosures. The average inMalaysia, the next-biggest Southeast Asian economy, climbed to 1.80% from 1.74%over the year.

Themean ratio of provisions to loans also rose in each of the three nations in2015.

Economicweakness spanning Asia is doubly problematic for banks with higher levels ofregional exposure, such as those in Malaysia and Singapore.

Bigbanks for now still have ample cushions against loan losses, and analysts seecurrent NPL levels as manageable for them. Yet, the latest Thai bank earningssuggest rising credit costs are something lenders in Southeast Asia should livewith for the foreseeable future.

S&P Global Ratings and SNLFinancial, an offering of S&P Global Market Intelligence, are owned byS&P Global Inc.