KEY RATING DRIVERS
Government Support Drives Ratings: SME Bank's National Ratings reflect Fitch's view that the Thai sovereign (BBB+/Stable) will provide extraordinary support to the bank, if needed. SME Bank is a state policy bank established by specific legislation to assist SMEs that may have limited access to financial services. The ratings also take into account the Ministry of Finance's (MOF) close control and near-full ownership. SME Bank's ratings are at the highest levels on the national rating scale to reflect the lowest expectation of default risk compared with other issuers in Thailand.
Key Policy Role: SME Bank plays a strategically important role in providing funding to smaller entrepreneurs in Thailand. We expect that the SME sector will remain an important constituency for the government, and that SME Bank will remain a key policy bank over the long term, given the bank's expertise and close ongoing collaboration with other state entities.
SME Bank has played a key role in supporting its clients during the pandemic, through regulatory relief programmes and debt restructuring, reflecting the more-vulnerable characteristics of small enterprises during economic turmoil.
Close Linkages with MOF: The ratings also take into account the MOF's 99.4% ownership of the bank. The government controls the bank's board of directors and strategic direction. There is also ongoing support and linkages with the government and other policy banks, such as in terms of liquidity and operations. Cabinet-mandated projects that are eligible for state compensation, such as in the form of interest and loss compensation, make up around 55% of SME Bank's loan portfolio.
There is a consistent record of support. For example, the government injected THB6 billion of new equity into the bank during 2019 and 2020 to enhance its capital ratios and support loan growth. The bank's establishing act also incorporates a framework for the MOF to guarantee the bank's bonds, and the bank has THB21 billion of MOF-guaranteed bonds outstanding.
Consistent Capital Support: The MoF has consistently injected capital into SME Bank as required, with the latest equity increases occurring in 2019 and 2020. The bank's current common equity Tier 1 ratio of 12.1% at end-2021 is above regulatory requirements, but could over the medium term be reduced by continued loan growth and the bank's plans for TFRS9 implementation by 2025. Nevertheless, we expect continued ordinary support from the government to mitigate downside risks to capitalisation.
Earnings Still Affected by Provisioning Pressures: SME Bank's performance improved slightly in 2021, with operating profit/risk-weighted assets at 0.7% (2020: 0.4%). Nevertheless, Fitch expects that credit costs will remain high to comply with upcoming accounting standards, as well as to reflect continued challenges for the SME client segment. In any case, this would not affect Fitch's expectations about government support propensity due to the bank's status as a state policy institution.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
There could be downside to SME Bank's ratings if the sovereign's propensity to support the bank were to reduce. For example, this could be due to a change in the bank's legal status as a policy bank, a reduction in the bank's policy role, or a significant decrease in the state's shareholding. Nevertheless, we view that such events would be unlikely to materialise in the medium term.
A decline in the government's ability to support the financial system would be unlikely to affect the bank's ratings, as Fitch expects that core policy banks are more likely to receive government support relative to other entities in the country, and hence the bank's relative position on the national rating scale would not change.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
There is no upside to the bank's National Ratings as they are at the top end of the scale.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
SME bank's ratings are linked to Thailand's sovereign rating.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings