Monday, April 22, 2013

The Thai economy is booming. Economic growth was an impressive 6.4 per cent in 2012 and is forecast to rattle along at roughly 5 per cent for the next couple of years.

Put into the context of a continuing recession in the eurozone, a possible triple-dip in the UK and a tepid 2.2 per cent recovery in the US, this is all the more impressive.

Thailand has built up competitive capabilities in electronics and automobiles, and also generates substantial income from tourism.

Government budget surpluses are now the norm and they have a respectable debt-to-GDP ratio of about 45 per cent, an enviable position compared with most of the West. Company balance sheets are also now in better shape, so much so that during the recent financial crisis the region escaped relatively lightly.

Combine a growing economy with a young population and a burgeoning middle class, and you have the recipe for sustainable and strong domestic driven growth. Throw a well-capitalised banking system into the mix, and overall private debt levels at only 75 per cent of GDP, and it is not surprising demand for credit is experiencing considerable growth.

As the economy has expanded, a middle class has emerged that demands houses, cars and other consumable goods.

Banks' willingness to lend, real interest rates near zero and low unemployment have led to a steadily rising property market.

Confidence is high in business, encouraging investment to meet growing demand and further boosting borrowing. Because of the strong economy, the number of loans that are going bad is limited. In such an environment the Thai banking sector looks a very attractive place to invest.

Thai banks are well capitalised and generate strong returns on equity, a measure of the quality of their business. The banking sector is expected to see roughly 14 per cent loan growth this year and next, having experienced similar growth rates in the past few years. A combination of higher fees from services, strong loan demand and better asset quality is seeing profitability rise across the sector. As returns improve then so should valuations.

The last time Thai banks experienced a strong improvement in profitability in the early 1990s, price to book values more than doubled. While the sector has already performed well, valuations remain attractive given the future growth, and plenty of upside remains.

All banks will benefit but the two banks which caught my eye are Bangkok Bank and Krung Thai Bank. Bangkok is the largest and most conservative, with a rock solid balance sheet but lower returns because of it. This represents the lowest risk way to gain exposure to the sector.

Krung Thai is slightly more geared with a lower quality book, but that makes the upside larger in the event that these favourable conditions persist and is for those with a larger risk appetite. A recent rotation out of Thailand by foreign investors has seen the sector sell off a little and now could be the time to spice up your portfolio.

By Jake Robbins