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  1. Analysis
May 18, 2007

Competition still growing in Thailand

Near-saturation in the market and strict regulation, combined with political uncertainty and economic slowdown, are compounding the downturn in credit card activity in Thailand The first quarter of a year is usually a sluggish season for credit card spending, but the market situation in Thailand has been further worsened by the weak economic environment

By Verdict Staff

Near-saturation in the market and strict regulation, combined with political uncertainty and economic slowdown, are compounding the downturn in credit card activity in Thailand. Titien Ahmad reports on the tactics employed by issuers that are nevertheless keeping competition hot.

Thailand: Negative growth in card loans, Q106-Q107The first quarter of a year is usually a sluggish season for credit card spending, but the market situation in Thailand has been further worsened by the weak economic environment. Credit card loans for the first two months of 2007 dropped by 2.49 percent compared to first two months of 2006. (See figure 1).

The economy has been hit by investor uncertainty since the military-backed government took control in last September’s coup and the restless southern provinces have become increasingly violent. Consumer confidence has hit a 62-month low according to a Consumer Confidence Index released by researchers at University of the Thai Chamber of Commerce. The index measures public sentiment toward the overall economy, job opportunities and future income, and polls 2,249 respondents nation-wide.

Non-performing loans (NPLs) are also increasing due to the sluggish economic environment. NPL values at Krungthai Bank and Bank of Ayudhya increased by 6 percent quarter-on-quarter. At Bangkok Bank they rose 0.25 percent over the same period. The bank has said that it is an acceptable increase given the current conditions, but it is relaxing debt repayment policies for some customers to ease their financial woes.

Increasing customer spend

Marketing campaigns in Thailand are now geared more towards encouraging card usage than acquiring cardholders, which has been the focus in the last two years.

A controversial campaign by Krungthai Card purportedly targets the affluent gay market – the commercial portrays a man who cannot choose between a male and a female partner. Krungthai Card executives have denied the association and asserted that the card appeals to highly confident customers with an average monthly salary of BHT100,000 ($3,000). A graduate entering the Thai civil service at the entry level earns about BHT9,000 a month.

Other banks have taken the more traditional giveaways route. Bangkok Bank offered one condominium unit each month from December 2006 to March 2007 to boost cardholder spending in the first quarter with its Perfect Life with Bangkok Bank campaign. Other rewards include gold bars and chains, Toyota and Nissan cars, and restaurant discounts.

Krungthai Card offers double reward points for spending on the company’s card in Hong Kong, Singapore, Malaysia and Indonesia, and life insurance policies to its premium cardholders. The highest spenders on Citibank’s platinum card each month receive a night’s stay in a premium local hotel.

Siam Commercial Bank offers 10,000 reward points to platinum cardholders after five transactions – regardless of value – have been made within 30 days after the approval of the card. The points may then be exchanged for air tickets from any airline or for other rewards.

Market saturation

The Thai credit card market is fairly saturated with 17 card issuers, but nevertheless new non-bank issuers continue to enter the market. According to Bank of Thailand, the kingdom’s central bank, local banks had a total of 4.4 million cards on issue with BHT55 billion outstanding at the end of March 2007. Foreign banks had 1.2 million cards, with BHT33.8 billion outstanding, while non-banks had 5.4 million cards with BHT77.7 billion outstanding as of the end of February.

Figures from Visa International (Thailand) indicate that credit card spend will increase by 15 percent in 2007 compared to 20 percent in 2006. Card issuers are not optimistic that the tide will turn, as government regulations have been making it increasingly unattractive for cardholders to spend on credit.

New regulations

Bank of Thailand has been steadily introducing regulations to manage the card usage and issuance levels since 2002. The minimum monthly income for credit card eligibility has been lowered from BHT20,000 to BHT15,000 a month. The minimum monthly payment has increased from 5 percent to 10 percent of outstanding debt and the credit limit is capped at five times the cardholder’s monthly income or cash flow. Those who default on payment for three consecutive months have their cards cancelled.

Changes in the interest rate, fees and service charges must be approved by Bank of Thailand. Companies advertising rates the central bank considers to be ‘unrealistic’ will be censured.

On the issuers’ side, marketers can promote card products to potential customers only between the hours of 8am to 8pm on weekdays and 8am to 6pm on weekends and public holidays.

Gifts may be offered to customers only after they have used the card in one credit period, rather than immediately after they have signed up. In response to this policy, Bangkok Bank launched a high-profile Bualang Thank You rewards programme; it has an emphasis on the gifts that cardholders are able to redeem using points earned from card usage.

Non-bank competition

Thailand: Cards in force by type of issuer, end-March 2007Non-banks such as Krungthai Card and GE Money dominate the Thai card market. GE Money is the largest credit issuer with 1.75 million cards through its partnerships with Bank of Ayudhya, retail giant Tesco, Hyundai Motor and Central Mall, a major department store in Thailand.

According to Bank of Thailand, the number of non-bank credit card company branches has grown by 83 from the first quarter of 2006 to the first quarter of 2007 and now totals 515.

Non-bank credit cards on issue have increased by 19,588 to 5.4 million as of end-February 2007 compared with end-February 2006. Non-banks hold a 50 percent market share for cards in force as of end-March 2007, as compared to 41 percent for commercial bank cards and 9 percent for foreign bank cards. (See figure 2.)

Cetelem has the largest and fastest-expanding network with 247 branches as of end-April 2007, followed by Aeon Thana Sinsap with 80 and Tesco Card Services with 72. In the first quarter, 61 of the 83 new branches were opened by Cetelem alone. In comparison, Bangkok Bank, the largest bank, has more than 700 branches.

Thailand: Card usage volume by type o fissuer, end March 2007However, banks have been able to hold their ground in terms of card usage. Commercial banks held a 57 percent market share in card usage volume as of end-March 2007, while non-banks had a 30 percent share and foreign banks 13 percent. (See figure 3.)

Non-banks typically target the lower-income segments, which explains the high card numbers but comparatively lower usage volumes.

The bank’s campaigns driving card usage have been largely effective. Bangkok Bank’s card spend by grew 17 percent year-on-year in the first quarter, driven by its marketing campaigns. According to Shoke na Ranong, the bank’s credit card head, without the campaigns, spending would have grown by only 12 percent to 15 percent in the first quarter.

Technology and leadership

The banks are increasing their spend on technology in a bid to improve their operations. Bank of Ayudhya recently introduced a Cardless ATM money transfer service that allows customers to transfer cash in real-time via the bank’s electronic channels using a mobile phone.

Kasikornbank’s recently launched Smart Shopping programme runs on the bank’s chip cards platform and Welcome’s payment technology to give merchants the ability to run in-store rewards and loyalty programmes. A first in Thailand, this roll-out is part of the bank’s strategic shift towards increasing transaction volume or card spend instead of expanding the customer base through card issuance.

Siam Commercial Bank is also in the midst of consolidating its data in a centralised data warehouse to provide a single, holistic view of its business.

The increased spending is also driven by fresh blood in the banks’ senior management ranks. For example, Siam Commercial Bank’s new president, Kannikar Chalitaporn, is not a seasoned banker: she was brought in from the marketing division of consumer goods giant Unilever Thailand in 2003 to revitalise the bank’s consumer marketing division. She has since been credited with a revamp in the bank’s retail banking strategies and its more consumer-friendly stance.

Michael Araneta, a senior research manager with banking technology research company Financial Insights, believes that “non-traditional bankers will increasingly hold sway in strategic decision-making by top banks in the country. These ‘new type’ of executives are marketing oriented, more aggressive, and generally more open to technology innovation. This would explain the high priority that is increasingly being given to sales and marketing effectiveness initiatives such as customer relationship management analytics, event-based marketing capabilities and real multi-channel integration.”

Araneta points out that “recent successes at Siam Commercial Bank have been attributed to non-traditional leaders. Other banks will be reorganising their executive management. Expect more dynamic leaders in government banks, particularly SCIB, to introduce fresh and dynamic ideas to the banking organisation.”

Outlook still optimistic

Although the outlook for the next quarter for customer spending is bleak, given the current political and economic conditions, analysts are generally optimistic that issuers with diversified balance sheets will fare well over the year. The central bank has also shown a willingness to cut interest rates to stimulate spending.

According to Sugittra Kongkhajornkidsuk, bank analyst at DBS Group Research: “Prospects for Thai banks remain strong, led by continued loan growth. We expect industry loan growth at 7.8 percent in 2007 versus internal loan growth target of 10 percent to 12 percent, up slightly from 6.8 percent in 2006. Asset quality will improve due to declining NPLs following write-offs and sale of NPLs (including to government asset management companies). Meanwhile, the new loan loss reserve requirement under the accounting standard IAS39 that applies to all Thai banks should strengthen the banks’ balance sheets in the future. And fee income should also continue to expand, led by consumer-related fees.”

The Bank of Thailand has raised loss provision requirements for banks in order to comply with IAS39, which requires the process of estimating impairment to consider all credit exposure and not just low credit quality. Banks would thus have to better handle and manage their NPLs.

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