istorically, the Thai banking industry has been critical to the country’s economy and, by extension, Thai society as a whole. In recent years, however, the banking sector has experienced a marked slowdown in growth and a decline in profitability. During this slowdown, followed by the disruption of the COVID-19 pandemic, the industry experienced declining relevance locally and regionally.
Now, with new opportunities on the horizon, the Thai banking industry could chart new frontiers by updating its meaning and purpose, reinventing its traditional roles, and making bold and innovative operational changes. If it can act quickly and decisively, the industry could once again play a leading role in the Thai economy and reclaim its position as a regional banking leader.
To do so, the banking industry could implement a four-pronged transformation that supports the growth of the Thai economy, reimagines business models to become nimbler and more specialized, innovates to meet evolving needs and preferences, and builds future-ready capabilities. An effective transformation along these lines, coupled with inspired and informed leadership, could enable the sector to embrace new growth engines, increase profitability, and accelerate value creation—fueling renewed prosperity and sustainability for Thailand in the decade to come.
From growth to stagnation as regional relevance declines
The Thai banking industry is well positioned to reimagine its role in society and unlock new growth, but its fluctuating fortunes over recent years serve as a warning against a business-as-usual approach. Over the past decade, the industry initially enjoyed a period of robust growth, but this phase was followed by a period of stagnation, characterized by slower growth and declining profitability (Exhibit 1). The downward trends of the second phase have continued into the present, partly as a result of the COVID-19 pandemic, and could persist unless action is taken to reinvigorate the industry.
Between 2009 and 2014, the Thai banking industry enjoyed a period of accelerated growth and value creation. Assets and revenues experienced rapid growth, enabled by a surging economy across all sectors. Profitability soared for leading banks, with return on equity (ROE) and return on assets (ROA) rising to around 20 percent and 2 percent, respectively, compared with industry averages of 14 percent and 1 to 1.5 percent for banks listed on the Stock Exchange of Thailand (SET).1
Thai banking’s growth phase was followed by a slowdown, with a sharp decline in sector profitability. Asset growth and revenue fell, driven by a broader economic slowdown. ROE and ROA also dropped, and the industry took a more cautious stance on lending in response to high household debt, a drop in auto-related loans, and a growing preference among corporates for raising funds via bond issuance due to regulatory reforms.
The decline in the banks’ performance was the result of a combination of factors. Yields were compressed by portfolio realignment toward low-yield assets—specifically, an increase in mortgages outstanding and a shift in loans outstanding from small and medium-size enterprise (SME) lending to corporate lending. Also, operational efficiency was low because of the slow pace of digitization and technology adoption among banks, combined with a sharp rise in expected credit losses. As a result, overall value creation for shareholders declined markedly.
Declining local and regional relevance
Over the past decade, Thai banking has become less prominent, both domestically and regionally. Within the country’s capital markets, Thai banks are trading at a significant discount to the rest of the economy—the price-to-book ratio (P/B) of the top five banks was 60 percent lower than overall stocks listed on SET at the end of 2021 (Exhibit 2). There has also been an increased divergence in valuation since 2014.
Regionally, Thailand’s share of total ASEAN banking market capitalization has declined from 16 percent in 2009 to 9 percent in 2021. On the list of the top 15 most valuable banks in the region, several Thai banks have been displaced by banks in Indonesia, the Philippines, and Vietnam.2 Thai banks are trading at a significant discount even relative to leading banks in other moderate- or lower-growth markets, such as Australia, Malaysia, Singapore, and the United States (Exhibit 3).
Thailand’s outlook: Reinventing banking for the new Thai context
The Thai banking industry faces a critical choice. If banks continue with a business-as-usual approach, stagnation may continue. However, they have an opportunity to adapt to the changing Thai context and chart a new course to increased value creation. This new context is shaped by three primary forces: shifts in the Thai economy and national priorities, changing demographics and consumer preferences, and fast-evolving technology infrastructure and adoption.
Shifts in the Thai economy and national priorities
The Thai economy is changing, with new growth engines being created to lift people from the middle-income bracket and ensure that the country is competitive in the post-pandemic era. New, innovation-driven industries, such as the digital economy, medical technology, automation, and robotics, are becoming increasingly important. More traditional economic activities, such as labor-intensive and resource-intensive goods and services, still account for 70 percent of GDP but could also be transformed with advanced technology.
Also, SMEs are an important and growing component of the economy. They contributed around 32 percent of GDP in 2020, up from 28 percent in 2015.3 Their continued growth could be crucial to the country’s economic well-being.
In the area of national priorities, the Thai government has set a target to achieve net-zero carbon emissions by 2065. This is expected to lead to increased adoption of new technologies such as battery electric vehicles (BEVs) and renewables, as well as a strong push to decarbonize carbon-intensive industries.
Changing demographics and consumer preferences
Like many countries, Thailand is undergoing rapid change in demographics and a corresponding change in consumer preferences. It is an aging society: with population predicted to peak in 2025, around 30 percent of Thais are expected to be over 60 years old by 2040.4 This aging population is spurring growing demand for wealth accumulation and retirement-planning services.
A notable shift in consumer behavior is a decline in customer loyalty. Consumers have shown they are very willing to switch banks, particularly if they feel they can get a superior digital experience elsewhere. Twenty-six percent of consumers switched their main bank between 2020 and 2021, with a further 51 percent considering a change.5 Alongside this, consumers are growing to trust nonbanks—particularly e-wallet providers, telcos, and large technology companies—to deliver financial services.6
Fast-evolving technology and infrastructure
Mirroring changes in the broader economy, the Thai banking industry is accelerating the adoption of new technology to drive growth, reduce cost, and increase efficiency. Banks are exploring and experimenting with AI, cloud, Web3, blockchain, digital assets, and neocores.
Mastering technology requires sufficient talent. Under pressure to stay abreast of technological advances, banks are competing within the industry and across all sectors for in-demand talent in technology, design, data, and analytics.
