FINANCE companies and banks that fail to raise capital are likely to be forced to merge, according to a leading stock analyst, who foresees an eventual end to the entire finance business even with successful recapitalisation plans.

Supavud Saicheua, executive vice president of Phatra Securities Co, the securities trading arm of Phatra Thanakit Plc, said that even those finance companies which manage to recapitalise are likely to choose to merge in order to win a commercial banking licence. Eventually, finance firms may disappear altogether.

Citing Phatra Thanakit Plc as an example, Supavud said that even though the company can raise capital with the financial support of Thai Farmers Bank (TFB), Phatra will be unable to compete with banks.

"There seems to be few choices for finance companies to strengthen their financial health. Becoming a bank by merging with others is a possible option. In two years time, we may not see any finance companies in the system," he said.

Realising the severity of the liquidity crisis, Supavud said that most finance firms face a dilemma whether to raise capital by the first quarter of next year as required by the central Bank of Thailand (BOT).

The BOT's tough measures, though admired for cleaning up the financial mess, have drawn criticism from all concerned players, who said the measures should have immediately followed the official announcement of the fate of the 58 suspended finance firms.

"The central bank should take swift action to tackle the problems before it is too late and it has a spill-over effect on the entire financial system," a financial expert said.

However, the disappearance of finance companies is expected by analysts because of the liquidity crisis and economic slump. Finance companies trying to fulfil the BOT's requirement will do their best to stay afloat during worsening economic conditions. A finance industry source said cash-strapped finance firms are likely to have no problems if they are fully backed by commercial banks. "I think any finance companies that lack the financial support of banks will face great difficulty meeting the BOT's requirement," he added. Most finance companies backed by the five largest local banks plan to raise capital by issuing new shares to existing shareholders. If this fails, the banks will be the last financial resort to fulfil the plans.

For instance, Union Asia Finance Plc (UAF), a subsidiary of Bangkok Bank (BBL), announced that it will raise capital by issuing 120 million shares on the condition that if existing shareholders are unable to buy those shares BBL will do so, but the share purchase must not exceed 100 million shares at Bt10 apiece. Asia Credit Plc, another subsidiary, also plans to issue 200 million shares. BBL and Paris-based Societe Gemrale will buy the entire tranche of new shares if existing shareholders waive their right.

Other subsidiaries are Bangkok First Investment and Trust Plc and Thaksin Thanakit Co Ltd. Dhana Siam Finance and Securities Plc, National Finance and Securities Plc, Book Club Finance and Securities Plc, Thai Summit Finance and Securities Co and Siam Sanwa Industrial Credit Co are among the subsidiaries of Siam Commercial Bank. Nava Finance & Securities Plc and Bangkok Asian Finance Ltd are subsidiaries of Thai Military Bank, while Krungthai Thanakit Plc falls under the umbrella of Krungthai Bank.

Subsidiaries of TFB are Phatra and Thai Investment and Securities Plc, while Ayudhya Investment and Trust Plc is a subsidiary of Bank of Ayudhya. Ksit Finance and Securities Plc, Vajiradhanathun Finance Co, Asec Finance and Securities Co are subsidiaries of Thai Danu Bank, Union Bank and Bank of Asia respectively.

Subsidiaries of Industrial Finance Corporation of Thailand are IFCT Finance and Securities Plc, Sakura Finance and Securities Co Ltd and First City Investment Plc. Independent groups are Citicorp Finance & Securities (Thailand) Ltd, Thai Capital Finance & Securities Co, Eastern Finance and Securities Co, BTM (Thailand) Finance and Securities Co, Ocean Finance and Securities Co, Mahatun Finance Co Ltd, Sethakarn Finance Co Ltd, National Finance Co Ltd, Asia Finance Co, Erawan Trust Co Ltd, HSBC Finance and Securities (Thailand) Ltd.

Bangkok Investment Plc and Kiatnakin Finance & Securities Plc, the two survivors of the group of 58 finance companies suspended in mid-year, are both independent. An analyst of Ekachart Finance and Securities Plc said that the BOT's capital increase requirement is necessary for the ailing banking system to strengthen the companies' financial positions.

A massive capital increase is needed as foreign capital continues to flow out of the country. "We need to strengthen the system or we will all be wiped out," the analyst said. A source from a finance and securities company admitted that the BOT's requirement is difficult to follow, but added it is necessary to restore investor confidence. A series of downgrades recently announced by international rating agencies have exacerbated the problems of already-hurting banks and finance companies. Standard & Poor's (S&P) said Thai financial institutions continue to be hurt by poor asset quality, dismal profitability and continued foreign capital outflows. S&P rival Moody's Investors Service lowered its foreign currency credit rating for Thai bonds and notes to junk bond status.

The downgrade is likely to slam the door in the face of local companies hoping to raise money overseas. Interest rates will be kept high to defend the embattled baht and that will add significantly to the burden of financially-ailing companies.