Thai banks are expected to post generally stronger profits for 2008, thanks to lower provisioning expenses and higher net profit margins.

But rising inflation, fuel prices and domestic political uncertainties remain key risk factors, and many banks have already begun warning that loan growth could slow in the second half.

First-quarter bank profits rose an impressive 23.9% from the same period last year, led by Siam Commercial Bank, Bangkok Bank and Kasikornbank.

Two second-tier banks - TMB and Siam City Bank - showed the highest rebounds in percentage terms, with first quarter earnings up five to six-fold from last year due to lower provisioning expenses.

Loan growth also rose impressively over the first four months, with Bangkok Bank, Krung Thai and Kasikornbank each posting growth of more than 5% from the end of 2007.

Interestingly, SCB, the country's third-largest in assets, saw its loan book end April practically unchanged from the end of 2007. This even as the bank's first-quarter profits led the sector at 6.78 billion baht, up more than 83% from the same period last year. Gains were led by growth in non-interest income, investment earnings and lower operating expenses.

SCB president Kannikar Chalitaporn cautioned that it would be tough for the bank to maintain profit growth through the next several quarters.

"I don't think that business performance in the second quarter would be better than the first quarter. We had quite a strong performance in the first three months," she said.

"If the bank's business operations in the remaining quarters of the year are as good as the first quarter, that will be good enough for us."

Mrs Kannikar said lending trends weren't expected to change significantly in the second half, even with the launch of the government's new infrastructure megaprojects.

The 1.7-trillion-baht megaprojects are expected to be financed through a combination of bank loans, foreign loans and state budget spending. But bank lending is not expected to begin in earnest for the projects until late this year or 2009.

Macroeconomic risk was another key issue for bank trends. Energy prices, in particular, remain a heavy risk for the economy and banking sector, as rising prices would only dampen demand and consumption, hurting loan growth and potentially leading to a decline in asset quality.

Political uncertainty is another question mark, although one with more direct impact on the equities market and investor sentiment than on bank profitability. Yet continued unrest, let alone outright violence between security forces and anti-government protesters, can only negatively affect consumption and investment, particularly foreign direct investment.

Prasarn Trairatvorakul, the president of Kasikornbank, said local banks did see political uncertainty as a major risk factor for the second half.

"Uncertainties will only add further weight to the existing problems of rising expenses and cost of living, affecting consumption and investor confidence," he said.

Higher fuel prices will result in higher business costs and lower profit margins for companies and lower disposable income for consumers.

Kasikornbank, while targeting loan growth of 10% to 15% this year, has tightened its credit-lending procedures and risk-management practices in light of a more challenging environment.

Meanwhile, Syrus Securities expects second-half bank earnings to decline as a result of the political and economic uncertainties.

Growth across the region was being revised downwards as a result of inflation and expectations that monetary policy must be tightened to help stabilise prices.

Locally, politics and the uncertainties over the stability of the government can only mean risk for policy continuity.

"The political situation is repeating the experience of two years ago," said one Syrus analyst, referring to the widespread protests in Bangkok that ultimately helped lead to the September 2006 coup and downfall of the Thaksin Shinawatra government.

"Certainly the street protests [by the People's Alliance for Democracy] have affected confidence, and with that we could see loan growth slowing in the second half."