Asia Times: Thai Military Bank's Capital Problems

ASIA HAND

Thai Military Bank in the line of fire

By Shawn W Crispin

BANGKOK - Soon after Thailand's military seized power last year in a bloodless coup, the Thai Military Bank (TMB) started to bleed cash. Now, the military-affiliated bank's dubious plan to raise US$1 billion in new capital threatens to set off new bouts of political and financial chaos.

TMB - Thailand's fifth-largest bank by assets, which maintains the personal bank accounts of many senior military officials - saw its overall retained losses jump from 44 billion baht (US$1.3 billion) at the end of last September to about 55 billion baht by year's end. The bank announced a 12.3 billion baht financial loss for 2006, a negative-257% swing from the 7.8 billion baht profit turned the previous year. Over the past calendar year, TMB's shares have fallen from about 5 baht to 1.8 baht per share at present.

To cover those losses and expand new lending, TMB unveiled plans this week to raise $1 billion in new capital through a rights issuance and debentures, which if fully subscribed would nearly double the bank's current capitalization. However, the question circulating in Thai banking circles is what foreign investor would possibly subscribe to the offerings in light of the bank's continued poor profitability, weak asset quality and new non-performing-loan risk.

A billion dollars is not chump change.

Last year, many foreign investors were peeved that TMB's management waited to announce the multibillion-baht loss until after it raised 10 billion baht in new capital through a rights issue. That track record will raise red flags with potential overseas investors for the new offering, and if, as many Bangkok-based banking analysts expect, it goes highly undersubscribed, the Ministry of Finance will likely - and because of its current military affiliation, controversially - be called on to use public funds to mop up the excess shares.

Of course the taxpayer will have to pick up the tab for the TMB's poor management and the military's greed and stupidity.

"It's the talk of the town in Thai banking circles," said one managing director of a big foreign bank, who requested anonymity. "And not only because it's the military's bank that is at risk of failing at a time it's in [political] control." It's still unclear whether investor realizations about the true scale of TMB's financial problems could have the same contagion effect that the collapse of a little-known finance company, Finance One, eventually had on the entire banking sector in 1997.

I don't know if I agree with this apocalypse scenario. The possibility exists, however. The thing is that there hasn't been a world-wide correction in a long-time. People seem to forget that the 1997 crisis brought about an overall reevaluation of financial sheets in emerging markets across the board.

At the height of the Asian financial crisis, Thailand's top three privately held commercial banks - Bangkok Bank, Siam Commercial Bank and Thai Farmers Bank (now known as Kasikornbank) - all raised enough capital to clean up their balance sheets substantially and boost their capital-adequacy ratios. The big three also by and large restructured their management and operations, specifically to guard against the profligacy and misjudgment that brought on the banking sector's collective 1997 collapse.

TMB, in comparison, has been a laggard on both fronts. After the crisis, TMB executives had trouble raising new capital in London and New York because of the bank's titular association with the armed forces, a foreign perception it has tried to change through its recent English-language rebranding to "TMB". When TMB finally did raise foreign capital belatedly 2000, it didn't raise nearly enough to deal with the scale of its underlying non-performing-loans problems.

Hopes ran high that TMB's strategic tie-up with Singapore's DBS Bank in 2004 would lead to substantial managerial and operational overhauls, including through a downsizing of staff levels and of its 374 branch network. However, Singapore's top bank only has a 16% minority stake, allowing it just two seats on TMB's board and only marginal managerial control. United Kingdom-based ratings agency Fitch Ratings released a report in January that said the TMB-DBS tie-up "has yet to yield any material improvement in the bank's financial performance, operations or franchise, which remain poor".

TMB looks like it is in big trouble. Why should it reform when the military has it covered?

The military government in effect nationalized Shin Corp subsidiary iTV by revoking its operating concession after the television station refused to pay more than $2 billion in court-ordered fines. Meanwhile, coup leader and TMB board member Sonthi has hinted at possible further asset seizures through public accusations that the Singaporean government has eavesdropped on coup leaders' private conversations through the communications satellites it now controls through its investment in Shin Satellite. And in Thailand's current nationalistic environment, it's highly unlikely that any major Western bank or private-equity outfit would take the chance on a military-affiliated bank.

These generals didn't see that getting revenge against Thaksin and Temsaek would actually have consequences in the real world. Seriously, who trusts the Thai military? Who would give their money to the Thai military?

At the same time, Thailand's central bank has been lenient toward TMB since the coup, allowing it in December to make a controversial coupon payment to shareholders of its so-called hybrid Tier 1 securities despite last year's extraordinary annual losses. Sovereign analysts, on the other hand, are not as forgiving. Fitch Ratings recently downgraded its ratings on TMB's foreign currency Tier 1 capital from "B+" to "B", in expectation that the bank will fail to make interest payments that come due in June. That lack of foreign confidence augurs ill for TMB and, by association, Thailand's military-run government.

This last paragraph is bad news. Basically, TMB will be issuing junk bonds and will hope people will buy them because the Thai generals look cute in their uniforms.

I may be wrong about this, but I thought the Shinawatras and Temasek owned a sizable chunk of Thai Military Bank.