Thai stocks, the second-worst performers among Asian emerging markets in 2017, face more headwinds as an unexpected jump in bad loans at banks weighs on investor sentiment.
Bangkok Bank and Krung Thai Bank led domestic lenders in reporting a rise in non-performing loans in January through March, prompting warnings from brokerages including Nomura Securities Co and Goldman Sachs Group. The benchmark SET Index dropped 1.2% last week, halting a five-week gain, as a group of banking stocks slid 3.4% following quarterly results.
“Banks’ higher bad loans have become a big concern again and this will put pressure on the overall equity market,” said Monthol Junchaya, the Bangkok-based chief investment officer at One Asset Management, which oversees about $3bn of assets. “Any further loan tightening will hurt domestic consumption and investments as credit extension is a key driver for overall economic recovery.”
Thai lenders’ worsening bad loans are emerging as a new risk amid slowing inflows of international funds, which propelled a 20% gain in the benchmark index last year.
The SET Index is up 1.3% this year, the worst performance after China among Asia’s emerging markets, according to data compiled by Bloomberg. Bangkok Bank, the nation’s largest lender by assets, increased loan impairment provisions by 59% from a year earlier in January through March, during which its net income was little changed. 
Krung Thai Bank’s NPLs rose 10% in the period, it said in a regulatory filing this month.
The benchmark SET Index dropped for a third day, falling as much as 0.1% and is headed for the lowest close in five weeks. The gauge for banking shares slipped 0.1%, posting a third day of declines.
The country’s lacklustre economy has limited the ability of some borrowers to repay loans since last year, according to a Bank of Thailand statement in February. The central bank predicts a 3.4% increase in gross domestic product this year, a pace that would lag behind the expected growth in neighbouring Southeast Asian nations.
Still, Thai equities’ valuations are attractive relative to those of regional peers, according to Henderson Global Investors.
The benchmark SET Index trades at 14.7 times its 12-month earnings estimate, according to data compiled by Bloomberg. 
That’s higher than the average multiple of 13.5 in the past five years. Indonesia’s key measure is at 15.5 times 12-month estimated earnings, the Philippines’ gauge trades at a multiple of 18 and Malaysia’s benchmark is at 16.3, according to data compiled by Bloomberg. Thailand “does seem to be in a more medium term view as one of the better places to be” in Southeast Asia, said Sat Duhra, a fund manager at Henderson Global in Singapore. “If you look at valuations in Indonesia, Philippines and Singapore to an extent, Thailand is actually more attractive on valuation and yield.” International funds have bought a net $179mn baht of Thai stocks so far this year, about 61% less than in the same period in 2016.
The banking sector has a combined market value of roughly 2.2tn baht ($64bn) or 14% of the SET Index’s total market value. It’s the biggest industry group among 28 after the energy sector.
The nation’s equities have lagged behind neighbouring countries as the sluggish economy has damped earnings growth, said Narongsak Plodmechai, the Bangkok-based chief investment officer at SCB Asset Management Co, the nation’s biggest private money manager with about $37bn of assets.


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