UPDATE 2-Fitch says may upgrade Thailand outlook to stable

* Political uncertainity remains a worry

* Outlook for banks bright in 2011, risks in telecoms (Adds details, comment on banks and telecoms)

By Arada Kultawanich

BANGKOK, Sept 1 (Reuters) - Fitch Ratings may upgrade Thailand's credit-rating outlook to stable from negative if the country's strong economic recovery proves sustainable, a senior Fitch analyst said on Wednesday.

"It is possible that we will revise the outlook to stable from negative and then potentially in the future may raise to positive, but that would be in the longer term," Andrew Colquhoun, director of Fitch Ratings Asia-Pacific sovereign group, told reporters.

On April 19, Fitch downgraded the outlook on Thailand's A-minus local currency rating to negative from stable, blaming political uncertainty, a slow economic recovery and a deteriorating policy environment.

That was during a period of political unrest in which 91 people died and life in the capital was disrupted, but the damage to the economy proved short-lived and even tourism has picked up since the protests were ended by the authorities in mid-May.

"If we see more evidence that the strength in economic growth in Q2 will be sustained, that would be inconsistent with the rationale for the negative outlook and it is more likely the outlook will be back to stable," Colquhoun said.

He added that the strength of Thailand's economy, which grew 9.1 percent in the second quarter from a year earlier, had surprised Fitch but that longer-term concerns still remained.

"Recent strong GDP growth quite surprised us but our concerns remain longer term ... The key question is whether the recovery of domestic demand is sustainable," he said.

Fitch expects the economy to expand 7 percent this year, broadly in line with the government and central bank.

Political issues would also remain a major factor for ratings, Colquhoun said. "Continued and intensified political uncertainty could worsen business and consumer confidence ... and lack of confidence weighs on investment and growth prospects."

In its April statement, Fitch retained Thailand's BBB foreign currency rating with a stable outlook because of its strong external financial position.

BANKS, TELECOMS

Vincent Milton, managing director of Fitch Ratings (Thailand), said the outlook for Thai banks was positive in 2011 as the cost of provisions should decline, resulting in higher profit next year if the economic recovery remained on track.

"The bank sector in general should show stronger results in the second half of this year and that should continue in 2011," he told Reuters, adding higher loans and fees would help profits.

In the first half, the seven biggest banks reported a combined 49.1 billion baht ($1.57 billion) in net profit, up 27 percent from a year earlier.

The main risk was asset quality, especially "special mention loans", a broad category of potentially weak credits.

"The special mention loans have risen sharply, but so far it doesn't appear there is significant transition to NPLs. In fact, if the economy is improving, the trend of special mention loans should improve," Milton said.

Fitch expected more competition in the telecoms sector after the rollout of third-generation mobile phone services in Thailand and leverage should increase due to high 3G investment, said Obboon Thirachit, an associate director at Fitch.

The fluid regulatory, policy and legal environment would remain a big concern for the sector, he added.

"The two largest operators have strong financial profiles to support additional costs, but True TRUE.BK remains significantly weaker than peers," Obboon said.

The top mobile phone firms are Advanced Info Service Pcl ADVA.BK followed by Total Access Communication Pcl DTAC.BK. ($1=31.25 Baht) (Editing by Alan Raybould)