Stable outlook for SME Bank
Fitch Ratings (Thailand) assigned "AA+" rating Small and Medium Enterprise Development Bank of Thailand (SME Bank). Flaws in the bank's finances and management are well compensated by its status, the rating agency said.
"SME Bank has been negatively affected by the sub-prime quality of its target customers, inefficient risk management and controls, and weak corporate governance. This has partly contributed to delays in fresh government capital injections, resulting in its capital ratio falling to 6.8 per cent at end-2011, below the regulatory requirement of 8.5 per cent. The bank’s continuously aggressive loan growth strategy will put pressure on capital levels, thereby heightening the need for further capital injections. In Fitch’s view, the pace of future capital replenishment from the government will depend on SME Bank’s business strategy, its plan for resolving non performing loans and the government’s available budget," Fitch said in a statement.
The rating is based on SME Bank’s legal status as a state enterprise due to its government ownership, specific policy role, strategic importance to the government, as well as ongoing financial support and control by the Thai government, it said.
Negative rating action is envisioned, in light of weakening of SME Bank’s policy role and strategic importance as well as a significant dilution of government ownership. Still, such seems impossible, in Fitch's view, given that the bank plays a crucial role in the development of SMEs which are not served by commercial banks.
SME Bank was established under the Small and Medium Enterprise Development Bank of Thailand Act BE 2545 (2002). The Finance Ministry owns 98 per cent of the bank’s shares. The bank is therefore under the supervision of the MoF, but monitored by the Industry Ministry for strategic industry exposure.
SME Bank has a public mandate to develop and support sub-prime, start-up and non-performing SMEs, which would otherwise expose the commercial banking sector to high levels of credit risk, by providing loans and other financial services. It also acts as a vehicle for the government to execute its industry development strategy. The bank’s strategic importance to the government is likely to continue over the long term, which should help ensure that government support is forthcoming, as seen in capital contributions since 2004.
