TRIS Rating Co., Ltd. has downgraded the company rating of Small and Medium Enterprise Development Bank of Thailand (SME Bank) to “A+” from “AA-” with “stable” outlook. The rating downgrade reflects the bank’s weaker stand-alone credit profile despite the strong degree of support from the Ministry of Finance (MOF) since it plays a national policy role as a key promoter of small- and medium-sized business enterprises (SME). The bank’s stand-alone rating significantly deteriorated, due mainly to weaker-than-expected financial performance and operating inefficiency stemming from loose internal controls and inefficient risk management practices. The stand-alone rating also takes into account the expected transition risk during the bank’s restructuring period, concerns over further deterioration of asset quality, as well as the unfavorable economic environment. All these factors may lower profitability during the medium term.
The “stable” outlook reflects the expectation in the medium term that SME Bank’s current board of directors and management team will be able to improve operating efficiency and establish a culture of good corporate governance to effectively control operating loose. The outlook also reflects the expectation that SME Bank’s relationships with the government and related state entities, along with financial support in the form of capital and subsidies from the government, remain unchanged in the future.
TRIS Rating reported that SME Bank was established in 2002, under the Small and Medium Enterprise Development Bank of Thailand Act of Parliament B.E. 2545 (2002), to take over the SME-support function as well as finances and operations of the Small Industry Finance Corporation (SIFC). Since establishment, the MOF contributed capital to the bank several times. The capital injection have totaled Bt8,500 million through December 2007. In December 2008, the MOF added Bt600 million, and additional Bt2,000 million is expected to be injected in 2009. The MOF’s stated intention to add capital confirms the strong financial support the government provides to SME Bank during a difficult time. The support is needed in order that the bank will be able to support SME owners and fulfill its policy role.
SME Bank posted a huge loss of Bt1,388 million for the first half of 2008, following an annual loss of Bt1,065 million for 2007. TRIS Rating expects that the bank's profitability will remain constrained by two factors: an unfavorable economic and business environment mainly in SME segment and an increase in loan loss provisions since loan quality is deteriorating at a faster pace than previously expected. Furthermore, additional write-downs are likely to be included in the bank's plan to reduce non-performing loans (NPL). The provision for loan losses could further impact profitability and deplete capital reserves in the near term. In addition, the impact from contingent liability from penalty charges incurred from interest rate swap contract will further compress the profitability. The bank needs to reserve approximately Bt800 million per annum for the next three years to cover the potential liability.
The ratio of NPLs to average loans jumped from 23% in 2005, to 45% in 2006, to 44% in 2007, and to 51% in June 2008. When compared with total loans, the NPL ratio was 19% in 2005, and further rose to 43% in 2006, 44% in 2007 and 51% as of June 2008. However, 99% of the NPLs were from loans originated before 2006. The rising NPLs raised the ratio of non-performing assets (NPA) to capital funds plus allowances for loan losses. The ratio stood at 2.1 times at the end of 2005, rose to 3.5 times at the end of 2006 and 2007, and climbed to 4.2 times in 1H08. This ratio is far worse than the average of 0.9 times for all 12 Thai universal banks and 0.65 times for the four special financial institutions (SFI). The ratio is expected to improve significantly after the injection of Bt2,000 million new capital in 2009.
TRIS Rating said, the challenge for the bank going forward is to balance its mission as a government-related entity to promote SMEs, while improving operating performance and operating efficiency with a standardized risk management system and practices. The priorities for 2009, under the new managing director effective on 5 February 2009, are a corporate reorganization, NPL resolution and tightening the underwriting process. — End
Company Rating: Downgraded to A+ from AA- Rating Outlook: Stable
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