Historically, 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).
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.
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.
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.
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.
Alongside this, consumers are growing to trust nonbanks—particularly e-wallet providers, telcos, and large technology companies—to deliver financial services.
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.
The shift to digital has also led to a rise in cyberthreats, with a costly impact beyond financial losses, including reputational losses, disruption, data theft, and fraud. Addressing such risks requires bank executives to focus more on cybersecurity.
The path ahead: A four-pronged transformation
With such fundamental changes occurring in the industry and society, the path ahead may not be easy for the Thai banking sector. However, the risks of not acting—and the potential rewards of a successful transformation—are high. Banks are more likely to stay relevant in the coming decade if their leaders are able to find new meaning and purpose.
A strategic approach to transformation could help. Based on the nature of the challenge and our experience with leading banks, we envision a four-pronged transformation strategy that Thai banks could use to reposition the role of banking (Exhibit 4). Ten imperatives have been identified that could be key to implementing the transformation strategy effectively.
Support sustainable economic growth
Rethink the corporate banking agenda to empower ‘new economy’ businesses
Thailand’s economy is at a critical inflection point. In 2016, the government announced a national strategy (Thailand 4.0) aimed at fueling innovation and retaining Thailand’s competitive edge.
This strategy identified several industries (S-curve industries) which could be crucial for Thailand’s continued growth, and the financial industry could play a key role in supporting these industries.
Thai banks could support Thailand’s new economic agenda and position themselves to navigate emerging trends by building financing capabilities to empower S-curve businesses and industries. To rebalance their portfolios toward S-curve industries, banks could build deep sector expertise in rapidly evolving and disrupted industries, upskill relationship managers (RMs) as strategic advisors for S-curve corporate customers, and leverage digital and remote-led solutions to serve evolving customer needs.
Boost sustainable finance to help reach Thailand’s net-zero targets
Thailand is shaping a pathway to reduce carbon emissions, with a target of achieving net zero by 2065. An estimated investment of $20 billion per year is required to support the transition, and Thai banks could play a critical role in helping Thailand achieve net zero through sustainable finance.
Sustainable finance in Thailand has typically been viewed through the lenses of corporate social responsibility (CSR) and investor relations. However, Thai banks could start to see sustainable finance as a new engine for growth. Banks have an important role to play in both reducing financed emissions and financing reduced emissions, with the latter probably being the more critical role.
As a starting point, Thai banks could develop robust net-zero strategies, including measurable targets, reducing emissions in their own operations, and pragmatic plans to reduce financed emissions. Banks could help decarbonize existing assets by issuing transition-finance instruments, such as retirement finance, which enables early retirement of legacy assets such as coal-fired power plants. Finally, banks can operationalize net-zero strategies by embedding tools, practices, and capabilities, such as integrating climate risk into core risk-management processes and developing capabilities to perform scenario analyses and stress testing of portfolios.
Enhance SME banking with digital, data, and analytics
SMEs are an integral part of Thailand’s economy. They constitute 99.6 percent of all enterprises, contribute about 35 percent of GDP, and employ approximately 70 percent of the nation’s workforce.
However, only 30 percent of Thai SMEs have access to financing from formal sources, such as commercial banks and non-financial institutions. Thai banks could enhance banking for SMEs to support this critical sector of the economy. To do so, banks will need to rethink their own operating models and product offerings to engage this relatively underserved segment adequately.
Thai banks could consider crafting customer value propositions (CVPs) and solutions tailored to SMEs’ diverse needs by developing a deep understanding of customers’ particular needs and pain points based on a granular view of their business activities and cash flows, and delivering simple, sharp propositions tailored to address these. Banks could also orchestrate ecosystem plays by systematically assessing various ecosystems within the economy (for example, mobility, housing, and e-commerce), and offering embedded-finance propositions to enhance customer experience and convenience. To advance SME banking, banks could innovate on risk assessment methodology through data and analytics by replacing lengthy, judgment-based underwriting with an effective credit scorecard. This entails building a modular credit-underwriting framework leveraging several different data sources and catering to all types of SMEs.
Create nimble and specialized business models
Build specialized wealth-management business models to serve different customer segments
Wealth management in Thailand is expected to grow strongly over the next five years, with assets under management (AUM) growing about 10 percent per year. This will mainly be driven by the affluent and mass-affluent segments, which are currently underserved. Differentiated offerings for these groupings are currently limited, and robo-advisory and digital management services are still nascent.
This presents an opportunity for Thai banks to serve currently underserved customer segments. By embracing new approaches, innovative service models, and digital-led capabilities and enablers, Thai banks can enter the vibrantly growing wealth management sector and better prepare the Thai economy for the changing demographics ahead. In particular, banks could focus on switching from the current product-focused model to an advisory-focused model to deepen customer engagement and increase fee-based income.
Excel in consumer finance in the digital age
Consumer finance in Thailand is a large and fast-growing market. In 2021, retail loans accounted for 35 percent of total bank loans, having grown at a CAGR of approximately 6 percent over the past five years.
Competition in this market is expected to intensify with the emergence of digital attackers, including ecosystem platforms, start-ups, and subsidiaries of incumbent banks, which are especially active in providing small-ticket loans.
Thai banks may need to act quickly to excel at consumer finance in this digital age. Five focus areas likely to be important for success are AI-powered credit decision making, omnichannel growth, personalization at scale, AI-powered customer management and servicing, and smart collections. By pursuing these strategies and building capabilities in these areas, Thai banks may stave off the challenge presented by new digital disruptors and capture the opportunity in the profitable consumer finance segment.
Explore partnerships to create a customer-centric, ecosystem- and platform-led neobank
Shifts in customer behaviors and expectations have accelerated over the past two years. Customers are increasingly looking for more convenience and immediate availability on a single platform, and the digital experience on offer is a decisive factor for many customers choosing to switch or continue their relationship with a banking service provider
In a consulting paper issued in early 2022, the Bank of Thailand stated its plan to introduce a virtual banking license to foster competition among financial services players, thus driving innovation and better service for customers.
Incumbent banks have an opportunity to leverage the upcoming virtual-banking license to form strategic partnerships with ecosystem and platform players as a way to launch digital attackers. Banks launching a customer-centric, partnership-led neobank could benefit from scale economies, access to more data, nimbler organizations, and greater ability to attract talent.
Develop innovative customer and employee experiences to meet evolving preferences
Reimagine propositions and customer experience through personalization at scale
Thailand’s banks could react to changing demographics and an evolving banking landscape by developing enhanced experiences for both customers and employees. Thai banks are increasingly turning to personalized offerings and customer experiences to deepen customer engagement, increase stickiness, and improve cross-selling opportunities.
Personalization involves tailoring the experience for customers by using what banks know about them and then optimizing propositions, channels, content, and journeys. But personalization ‘at scale’ takes this a step further by tailoring every experience for every customer by using all data available—and then optimizing propositions that engage customers, create channels within and beyond banking, and produce extremely appealing content and experiences
Thai banks are still at a relatively early stage in their personalization journeys. To reap the full benefits of increased personalization—including revenue growth, cost savings, increased customer acquisition, and improved customer satisfaction—Thai banks may need to continue their journey toward personalization at scale. To do this, they could implement the seven building blocks of personalization at scale: offering tailored value propositions, creating personalized campaigns, reimagining the customer journey, leveraging analytics, building a data foundation, adopting a full marketing-technology stack, and establishing agile marketing pods.
Reinvent ways of working and employee value propositions
Banks are increasingly competing with technology companies and start-ups to attract and retain talent to support their digitization goals. To win the war for talent, banks need to understand what digital talent seeks.
Thai banks have an opportunity to sharpen employee value proposition and reinvent EX by leveraging data and finding inspiration in global best practice—just as they could do to reimagine CX. Banking leaders could follow a systematic approach, starting with a clearly stated aspiration and purpose, leading to a reimagined employee journey supported by key transformation enablers. This journey would include establishing the EX aspiration and vision, crafting a compelling employee value proposition, transforming the core EX journey, and enabling EX transformation through measurement and performance management.
Build future-ready capabilities
Accelerate the adoption of new technology
The remarkable advancement in digital technologies has had a profound impact on almost every aspect of the banking industry. A new wave of innovation is accelerating economic development globally, but also disrupting the traditional banking ecosystem.
To stay relevant, the global financial-services industry has had to respond to several major breakout technologies, including artificial intelligence (AI), distributed ledger technology (DLT), and neocores. Thai banks are no exception and may need to accelerate their adoption of these new technologies. AI could be leveraged to comprehensively support customer experience and retention, product offerings, risk management, and operations efficiency. Thai banks could explore opportunities in DLT including digital-asset trading and wealth-management products and facilitating payments within the digital-asset ecosystem. And finally, Thai banks could consider adopting neocores to ensure that they have modular infrastructure to support the fast-changing banking landscape.
Strengthen cybersecurity to combat the ‘dark side’ of digital
The digital economy brings new risks and challenges, and among these, the risk of cyberattacks is an important and growing concern for Thai banks. Cybersecurity is now of paramount importance for the banking sector. In recent years, global cyberattacks have risen dramatically and have had an increasingly severe impact; between 2015 and 2021, the cost of cybercrime doubled, from $3 trillion to $6 trillion.
While the Thai banking sector leads its regional peers in its level of cybersecurity maturity, there is room for improvement. Thai banks should take action to build on their solid foundation of cybersecurity and respond effectively to the pressing threat of cyberattacks. To do so, they could build a holistic enterprise risk management framework for cybersecurity and integrate cybersecurity into product and technology development. This would be enabled by building their cybersecurity talent.
This is a crucial moment for the Thai banking industry. Failure to act is likely to lead to continued lackluster performance, with far-reaching consequences. Globally, the banking industry is seeing great changes, particularly in new technologies and the migration to digital. Thai banking simply cannot afford to be left behind. Now is the time for the industry to seize the current opportunity to make robust and far-reaching changes.
By embracing this comprehensive transformation and ensuring that they fulfill the ten imperatives outlined in this report, Thai banking can rise to the challenge and enjoy strong growth and increasing profitability as it enters a new era.