Thai Banks: Dividend Fortresses Amid Rate Pause and Trade Uncertainties

Thailand's banking sector faces a delicate balancing act: navigating rising geopolitical risks, a slowing economy, and elevated non-performing loans (NPLs), while maintaining dividend payouts that make them compelling for income-focused investors. With the Bank of Thailand (BOT) pausing interest rates at 1.5% and banks bolstering capital buffers, the sector offers opportunities for selective investors—but the path requires careful stock picking.

Valuation and Dividend Opportunities: A Sector Divided

Thai banks are trading at a discount to their historical averages, with the sector's price-to-book ratio averaging 0.8x, down from pre-pandemic levels. This presents a buying opportunity for investors seeking steady income, as many banks maintain dividend yields above 4%, far outpacing bond yields.

- Krungthai Bank (KTB): With an NPL ratio of 2.75% (among the lowest in the sector), KTB's dividend yield of 4.5% and strong capital adequacy ratio of 16% make it a top pick. Its exposure to corporate lending and infrastructure projects insulates it from retail-sector headwinds.
- Tidlor Holdings (TIDLOR): A 3.8% dividend yield and NPL ratio of 2.9% (slightly elevated but manageable) reflect its focus on SMEs in resilient sectors like healthcare and logistics. Its Stage 2 loans (early warning signals of credit risk) are below the sector average.

In contrast, MTC (Mahanakorn) and KTC (Kasikornbank's consumer finance arm) face risks tied to retail and real estate lending. MTC's NPL ratio for housing loans has surged to 7.35%, while KTC's credit card and auto loans—already under pressure from high household debt—are vulnerable to further deterioration if GDP growth slips below 3% in 2026.

NPL Resilience: A Sector Under Pressure but Not Broken

The sector's Q1 2025 NPL ratio rose to 2.90%, driven by SMEs and mortgages. Yet banks remain resilient thanks to robust capital buffers (14.5% average capital adequacy ratio) and proactive debt restructuring programs like the “You Fight, We Help” initiative.

While the NPL trajectory is upward, the sector's Stage 2 loans (potential future NPLs) have stabilized at 6.97%, signaling that the worst may not be ahead. Banks like KTB and TIDLOR have diversified portfolios, with SME loans concentrated in less trade-sensitive sectors, reducing exposure to U.S.-Thailand tariff disputes.

Macroeconomic Trade-offs: Rate Pause as a Buffer, but Risks Loom

The BOT's decision to pause rate cuts offers a respite for banks' net interest margins (NIMs), which had been squeezed by declining rates. However, two key risks loom:
1. 2026 GDP Downgrades: If Thailand's GDP growth slips further—currently projected at 3.5%—consumer and SME lending could weaken, pressuring NPLs.
2. U.S.-Thailand Trade Negotiations: New tariffs on Thai exports (e.g., solar panels, steel) could strain SMEs reliant on U.S. markets, a risk the BOT's stress tests are designed to mitigate.

Investment Strategy: Overweight Banks, but Pick Defensively

For income investors, Thai banks offer a rare combination of stability and yield. However, success hinges on avoiding overexposure to vulnerable segments:

• Overweight Picks:
• KTB (4.5% dividend yield, 2.75% NPL) and TIDLOR (3.8% yield, 2.9% NPL) for their asset quality and diversified revenue streams.

• Both have Stage 2 loans below 6%, signaling low near-term NPL risk.

• Avoid:

• MTC and KTC, where housing and consumer loans dominate. Their NPLs are already elevated, and further weakness in household income could push ratios higher.

Conclusion: A Defensive Play for Income Seekers

Thailand's banking sector is a compelling income opportunity, but investors must navigate a landscape of diverging risks. The BOT's rate pause buys time for banks to strengthen balance sheets, while geopolitical risks and GDP headwinds demand caution. For those willing to pick the right stocks, Thai banks offer a rare mix of dividend resilience and valuation upside.

Final Call: Overweight the sector, but focus on KTB and TIDLOR. Avoid banks overly reliant on retail and real estate lending. Monitor NPL trends and the outcome of U.S.-Thailand trade talks—both could redefine the sector's trajectory in 2026.