CIMB Group Holdings Bhd’s asset quality is seen to be stable in all its key markets, except for Thailand where high levels of loan loss provisions are expected to continue in the final quarter of this year and possibly early next year.

In a meeting with analysts last Wednesday, CIMB Group’s management guided that apart from Thailand and selected corporate accounts in Singapore, asset quality in its two other key markets — Malaysia and Indonesia — has been relatively stable. It expects to make further provisions in Thailand in 4Q2016.

CIMB Group’s 93.7%-owned subsidiary there, CIMB Thai Bank PCL, last week reported a 13.5% year-on-year drop in third-quarter net profit to THB431.07 million. This was mainly because of a 15.8% increase in provisions to THB844.56 million.

On a quarter-on-quarter basis, however, provisions fell 39%. Nevertheless, analysts do not expect that sequential trend to continue into 4Q2016.

“I expect higher quarter-on-quarter provisions for CIMB Thai in 4Q2016, and maybe a bit more going into early next year, but then it should start to stabilise. So, maybe two more quarters of provisions before things stabilise,” a banking analyst tells The Edge following the briefing.

CIMB Thai is likely to take on higher provisions in the final quarter, especially since its loan loss coverage ratio has declined to just 81.6% as at Sept 30 from 106.5% as at the end of last year.

The bank’s gross non-performing loan (NPL) ratio deteriorated to 4.2% as at Sept 30 from 3.1% in December 2015, due to slower repayment ability by borrowers, given the weaker economic environment.

But CIMB Thai is not alone in seeing an uptick in provisions in recent times. Other Thai banks, too, have been seeing spikes in the NPLs of small and medium enterprises (SMEs), particularly in the agricultural sector and auto loans.

“We remain concerned over the elevated levels of loan delinquencies [at CIMB Thai], as it is an area which we would have expected to see some improvements. With Thailand forecast to be among the weaker Asean economies in 2016/17 by both the World Bank and International Monetary Fund, overall conditions are not likely to improve significantly anytime soon, which adds to the worry,” an analyst with PublicInvest Research says.

Still, it is worth noting that CIMB Thai’s contribution to CIMB Group’s earnings is small, at just around 3%.

For the nine months ended Sept 30, CIMB Thai’s net profit fell 5.71% to THB798.31 million, due mainly to a 16.7% increase in provisions to THB3.378 billion. This was pretty much within analysts’ expectations as it accounted for 72% of consensus estimates for the full year.

Its performance on an operational level was, however, decent; pre-provisioning operating profit grew 10.6% to THB4.38 billion.

The World Bank estimated in June that Thailand’s economy will grow only 2.5% this year after expanding by 2.8% last year. This month, however, it raised its forecast to 3.1%.

The relatively weak Thai economy is constricting loan growth to the lower single-digits despite the Bank of Thailand maintaining its interest rate at 1.5%. While there are worries that the recent passing of King Bhumibol  Adulyadej and the resultant year of mourning that will be observed in the country may hurt the Thai economy’s prospects further, some analysts say they are not overly concerned about its impact on the banking sector.

“We don’t foresee whatever problems Thailand is having to continue into next year. At its worst, things will stabilise,” a banking analysts tells The Edge.

Just last Wednesday, CIMB Thai welcomed a new president and CEO, Kittiphun Anutarasoti, and it will be interesting to see how he steers the bank through these tougher times. He has 24 years of banking experience and has previously worked with three global banks and two of the largest Thai banks.

The previous CEO, Subhak Siwaraksa, retired after a seven-year tenure but will be an adviser to CIMB Group CEO Tengku Datuk Seri Zafrul Aziz.

Of the Malaysian banks with a regional presence, investors tend to keep a closer watch on CIMB Group’s asset quality, given its relatively stronger exposure to and earnings contribution from Thailand and Indonesia, where there has been an uptick in NPLs.

Not too long ago, it was Indonesia that was investors’ biggest concern for CIMB Group. Most of CIMB Group’s provisions so far in the first half of this year have been for its Indonesian operations, where there were problems with mainly coal and coal-related accounts.

But concerns over the high levels of provisioning there seem to be abating. At the analyst briefing last week, CIMB Group’s management said there has been gradual improvement in asset quality there. “However, while coal prices have recovered significantly, this is not filtering through to the pace of loan recovery, which is envisaged to be a long-drawn-out process,” says Maybank Investment Bank Research.

It adds that in Singapore, CIMB Group’s asset quality is stable but provisioning levels are not improving just yet.

As for its home market of Malaysia, from which CIMB Group derives the bulk of its earnings, provisions are seen holding up with no significant deterioration in asset quality. The group’s gross impaired-loan ratio worsened to 3.16% as at June 2016, rising 12 basis points from three months earlier.

“There is no significant stress in asset quality from the SMEs and retail side, but management indicated there are potential downside risks from the retail side with the still challenging economic environment. There are no concerns on loans exposed to the oil and gas (O&G) sector as most loans involved the big players with no indication of stress yet,” Kenanga Research says.

Its O&G exposure is largely skewed towards the much larger local companies such as SapuraKencana Petroleum Bhd, Bumi Armada Bhd and UMW Oil & Gas Corp Bhd, where analysts say the default risk is deemed lower due to a combination of strong owner backing or relatively more resilient financials and contract banking.

“Relatively riskier overseas O&G exposure represents less than 0.5% of group loans. As such, management alluded restructuring and rescheduling (R&R) activity within its corporate loans remains low, which is important as Bank Negara Malaysia requires any R&R loans to be classified as impaired,” UOB Kay Hian Research notes.

Given that, as a whole, CIMB Group’s asset quality is seen stabilising, if not improving, analysts do not expect any surprises in the group’s third-quarter earnings, which will be announced late next month.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.