Net interest income accounted for 70% of lenders’ profits during the first half of 2020.

A prolonged period of low interest rates will hit on Thai banks’ profitability, the central bank having loosened its monetary policy to a historic low in order to fight the sharp economic downturn, reports Moody’s Investors Service.

The Bank of Thailand cut the policy interest rate to a historical low of 0.5% from 1.25% at the beginning of the year, and in September reiterated its commitment to keep rates low stating the economic recovery will take at least two years.

This is problematic for local lenders, as net interest income accounted for over 70% of their revenue in the first half of 2020.

"Narrowing net interest margins, combined with weakening loan growth, will reduce net interest income – the main source of profit for Thai banks," said Jeffrey Lee, a Moody's assistant vice president and analyst.

In order to combat the ill-effects of the policy cut, banks are now expected to step up efforts to grow both domestically and overseas, although any resultant margin improvement will come at the expense of capitalization, leverage and asset risk, he added.

Notably, whilst increased digitization could help reduce operating costs as banks scale down physical operations, any benefits will take time to materialize.

Research and development and the costs of recruiting talent with the relevant skills will also add to operating expenses, erasing the benefits of digitization in the short term, Lee concluded.