Asset Quality Pressure Mounts on Thailand Banks Despite Attractive Dividend Yields
CGS International Securities (Thailand) (CGSI) maintained a “Neutral” outlook on Thai banks, acknowledging a current lack of strong near-term catalysts despite the sector’s continued attractiveness based on high dividend yields. This assessment followed the recent release of third-quarter 2025 financial performance and asset quality data from the Bank of Thailand (BOT) on November 18. The official report highlighted a noticeable deterioration in overall loan quality, showing an increase in the Stage 2 (underperforming) loan ratio to 7.24 percent in 3Q25, which is up from 6.88 percent recorded in the previous quarter.
Furthermore, the Stage 3 (non-performing loan or NPL) ratio also moved slightly higher, reaching 2.94 percent from 2.91 percent quarter-on-quarter. The central bank attributed the rise in the NPL ratio primarily to loan contraction across key segments, specifically mentioning large corporations, small and medium-sized enterprises (SMEs), and unsecured retail lending products such as credit cards and personal loans.
The BOT provided a crucial detail, noting that the hike in the Stage 2 ratio was predominantly driven by a qualitative reclassification process applied to certain large corporate loans and, conversely, some loans being upgraded from Stage 3 back to Stage 2. This suggests a mixed picture where active restructuring is occurring alongside new vulnerability in the corporate sector, which necessitates vigilance from all Thai banks.
In contrast to the broader trend, the retail auto loan segment demonstrated a minor asset quality improvement, with the Stage 2 ratio easing to 14.13 percent from 14.35 percent and Stage 3 loans declining to 2.17 percent from 2.22 percent, an improvement attributed to stricter underwriting standards applied over the last three years and the onboarding of higher-quality new loan customers. The stability of housing loans remains a supporting factor for the Thai banking system’s resilience, partly credited to the proactive “You Fight, We Help” program, which provides qualified borrowers with payment relief through interest suspension and lower monthly installments.
Sector Valuation and Key Risks in the Thai Banking Landscape
Despite the increasing asset quality pressures, CGSI continues to view the Thai banks sector as attractive for investors focused on steady income generation, specifically due to the high dividend yields offered. The sector is currently trading at a forward price-to-book value (P/BV) multiple of 0.69x for 2026, a valuation slightly above its five-year historical average of 0.64x. This suggests that the market is willing to pay a marginal premium for the expected income stream, even while acknowledging the asset quality risks.
Thai banks face major downside risks stemming from a potential further rise in non-performing loans, driven by a sputtering domestic economy and prolonged household debt issues. Additionally, an unexpected policy rate cut by the Bank of Thailand, while supporting economic growth, could compress the Net Interest Margins (NIM) of the Thai banking institutions, thereby lowering profitability and potentially impacting dividend payout capacity.
Conversely, there are several upside triggers that could quickly re-rate the sector, including a robust boost in tourism arrivals, which injects foreign currency and stimulates credit demand, an improvement in the challenging U.S. tariffs situation which would aid exports, and the successful launch of new government infrastructure projects that stimulate corporate lending. CGSI’s top picks in the sector are SCB X PCL (SCB) and Kasikornbank PCL (KBANK), which are both projected to deliver exceptionally attractive annual dividend yields ranging from 5.6 percent to 9.7 percent over the 2026-2027 period.
Krung Thai Bank PCL (KTB) and Srisawad Corporation PCL (SAWAD) were noted to have the largest operational presence in the southern provinces, which recently experienced flooding in mid-November 2025. However, the estimated loan exposure in these eight affected provinces is minor, accounting for less than 1-2 percent of the total loans across both the banking and non-bank finance sectors, suggesting a minimal direct impact on the overall sector’s asset quality metrics.
Individual Bank Performance, Investment Ratings, and Capital Strategy
The analyst’s individual stock recommendations provide a detailed look into expected bank performance and capital allocation strategies among key Thai banks. Bangkok Bank PCL (BBL) received a “HOLD” rating with a target price of THB 156 per share. This rating is underpinned by BBL’s characteristically conservative approach to capital management, reflected in an expected dividend payout ratio of approximately 40 percent for 2025F-2027F, an increase from 36 percent in 2024.
However, its return on equity (ROE) is projected to ease slightly, falling to a range of 7.0 percent to 7.9 percent in 2026F-2027F from an estimated 8.5 percent in 2025F, indicating potential headwinds to profitability despite its strong balance sheet. Kasikornbank PCL (KBANK) earned an “ADD” rating and a higher target price of THB 196 per share.
This positive outlook is largely based on the potential for upside in KBANK’s dividend payout assumption, which is currently projected at 41-48 percent for 2025F-2027F. This upside is supported by the bank’s robust balance sheet and a strong Capital Adequacy Ratio (CAR) of 20.9 percent as of 3Q25, giving it substantial financial cushion.
Furthermore, the bank’s commitment to shareholder return is clear through the commencement of an THB 8.8 billion share buyback program running from November 2025 to May 2026. SCB X PCL (SCB) also maintained an “ADD” rating with a target price of THB 151 per share, primarily standing out for having the highest forecasted dividend yield among the Thai banking stocks covered by CGSI, projected at an impressive 9.1 percent to 9.7 percent for 2026F-2027F.
This exceptional yield is built on an aggressive assumed dividend payout ratio of 80 percent of net profit and strong ROE estimates, ranging from 10.0 percent to 10.4 percent during the 2025F-2027F period, positioning SCB as a premium income play for equity investors seeking substantial returns from the Thai banking sector.
Financial Analyst Commentary: Capital Allocation and Southeast Asian Competition
The current valuation of Thai banks at 0.69x forward P/BV, coupled with high dividend yields, suggests the market perceives the sector as fundamentally cheap but fundamentally constrained by Thailand’s protracted slow growth, high household debt, and a difficult political landscape that impedes timely infrastructure Investment. This low valuation contrasts sharply with regional peers in Southeast Asia, such as those in Indonesia or the Philippines, which often trade at P/BV multiples above 1.0x due to higher GDP growth projections and lower NPL ratio concerns.
The qualitative reclassification of large corporate Stage 2 loans, noted by the BOT, is a critical Finance indicator. It implies that while outright defaults (Stage 3) are stable, a growing pool of major corporate borrowers are showing early stress, potentially requiring future restructuring that could negatively impact bank profitability and capital requirements.
The aggressive dividend payout ratio of 80 percent assumed for SCB, while attractive to yield-seeking Investors, highlights a strategic difference in capital allocation compared to BBL’s more conservative 40 percent ratio. In a challenging Economy where NPLs are rising, a higher payout ratio may limit a bank’s internal capital generation capacity necessary to absorb potential credit losses or fund new growth areas like regional expansion or FinTech acquisition.
From a Business strategy perspective, the continued reliance on retail lending (despite auto loan improvements) suggests Thai banks need to aggressively pursue regional expansion into high-growth ASEAN markets, a strategy already being deployed by key players like KBANK, to offset the structural domestic slowdown and improve their ROE metrics closer to regional averages. The Investment decision thus hinges on a trade-off: accepting modest capital appreciation for reliable, high dividend income, or betting on specific banks like KBANK and SCB that are demonstrating clear, aggressive strategies to enhance shareholder value through buybacks or high payouts despite the underlying Economic risks.
