Fitch Upgrades Thailand's SME Bank; Affirms IBANK

Stocks and Financial Services Press Releases Thursday May 23, 2013 11:12
Bangkok--23 May--Fitch Ratings
Fitch Ratings has upgraded Small and Medium Enterprise Development Bank of Thailand's (SME Bank) National Long-Term Rating to 'AAA(tha)' from 'AA+(tha)'.

At the same time, Fitch has affirmed Islamic Bank of Thailand's (IBANK) Long-Term IDR and Support Rating Floor at 'BBB-' respectively. Its National Long-Term Rating has also been affirmed at 'AA(tha)'. The Outlook is Stable. A full list of rating actions is provided at the end of this commentary.

The upgrade of SME Bank's National Long-Term Rating reflects Fitch's reassessment of its importance to the government in policy functions. The Ministry of Finance's (MOF) recent close monitoring of the bank's liquidity and provision of liquidity underline a high probability of ongoing state support.

IBANK's ratings are affirmed to reflect Fitch's view of a high probability of government's support for IBANK, albeit less than that to other state banks rated by Fitch, mainly due to the government's lower direct ownership and less explicit government support.

Key Rating Drivers - IDRs, Support Rating, Support Rating Floor and National Ratings

SME Bank's National Ratings are driven by its high level of effective government ownership, legal status as specialised financial institution (SFI), specific policy role, and strategic importance to the government. The MOF shall compensate the bank for losses incurred resulting from some of its public mandates to support weak credit SMEs. Fitch believes the propensity for the government to support SME Bank is no different to other policy institutions whose ratings are equalised with the sovereign.

IBANK's ratings are driven by Fitch's view of a high probability of government's support for the bank. IBANK, which the government effectively controls, also has a unique public policy role in providing Islamic financial services to Thais and domestic businesses and to support government policies, particularly those related to Muslim communities in southern provinces. However, its ratings are below SME Bank's and the other two Fitch-rated SFIs' (Government Housing Bank (AAA(tha)/Stable) and Export-Import Bank of Thailand (BBB+/AAA(tha)/Stable). This reflects its lower direct government ownership (limit at 49%), less explicit government commitment for support stated in its establishment act, its weaker policy role and lower strategic importance to the government compared with other SFIs. There is also uncertainty over the government ownership of IBANK in the future.

The Stable Outlooks of SME Bank and IBANK reflect Fitch's expectations that the government will continue to support the banks in case of need.

Both SME Bank and IBANK receive capital support from the government, albeit with delay to the point that the banks are having to operate below regulatory minimum capital ratios, and with regulatory forbearance. Nonetheless, liquidity support from the government to these two policy banks to help meet outflows has thus far been timely.

The MOF has been providing the banks with liquidity on a timely basis in the form of deposits and liquidity facilities, respectively, from various government departments and strong SFIs. Both banks expect large capital injections from the state in late 2013/early 2014 once they have successfully implemented their rehabilitation plans. SME Bank has already received a small capital injection in March 2013, while IBANK will also receive a modest capital increase in June 2013.

As weak asset quality has been a major challenge for both SME Bank and IBANK, the banks are implementing business rehabilitation plans to lower non-performing loans and non-performing financing and to improve their origination and collection systems.

Rating Sensitivities - IDRs, Support Rating, Support Rating Floor, and National Ratings

For SME Bank, any perceived in weakening in the sovereign's propensity to support due to a legal amendment or a change in legal and ownership status or in policy role could result in negative rating action. However, this is a remote prospect as long as SMEs remain an important part of the Thai economy and the bank retains its role in supporting weak credit quality SMEs, which are not served by commercial banks.

For IBANK, any movement in Thailand's ratings could affect IBANK's ratings. Increasing probability of government support, indicated by increasing direct ownership by government or explicit support statement from the government, could lead to a positive rating action on the banks' ratings. However, this is unlikely as it would require legislative changes and given the government's initial intention to limit its direct ownership in IBANK.

The ratings actions are as follows:
SME Bank:
  • National Long-Term Rating upgraded to 'AAA(tha)' from 'AA+(tha)'; Stable Outlook
  • National Short-term Rating affirmed at 'F1+(tha)'