TRIS Rating Co., Ltd. has affirmed the company rating of Small and Medium Enterprise Development Bank of Thailand (SME Bank) and the rating of its Bt5,000 million senior debentures (SME087A) at “AA-” with “stable” outlook. The ratings reflect the strong financial support that SME Bank has received from the government through the Ministry of Finance (MOF) because of the bank’s influential role as a key promoter of small- and medium-sized business enterprises (SME), one of Thailand’s economic growth engines. SME Bank’s stand-alone performance was considered in line with expectations, and the overall ratings are maintained due to strong government support. During 2007, under a new board of directors and management team, there was clearer evidence of the bank’s efforts to reorganize its management system and to improve its risk management system framework in order to reduce inefficient practices and problems relating to loose internal operations. The ratings also take into account the expected transition risk during the bank’s restructuring phase, as well as the less favorable economic environment, which might limit its profitability in the future. The “stable” outlook for SME Bank reflects its influential status as one of the main policy banks that helps spur growth of the economy through the long-term funding it provides to SMEs. The outlook is based on the expectation in the medium term that SME Bank’s current Board of Directors and management team will be able to improve its operating efficiency and establish culture of good corporate governance to effectively control internal operating losses. The outlook also reflects the expectation that SME Bank’s relationship with the government and related state entities, along with financial support in the form of capital and subsidies from the government, is unlikely to change 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), which was constituted under the Small Industry Finance Corporation Act B.E. 2534 (1991). Prior to the upgrade of SIFC into SME Bank, the MOF twice injected new capital into SIFC, and two years after the creation of SME Bank, the MOF added more equity. The Bt2,500 million recapitalizations in October 2005 and MOF’s stated intention to add an additional Bt1,200 million in capital to the bank in December 2007 confirms the strong financial support the government provides to SME Bank to perform its policy role to support SME operators. TRIS Rating said, SME Bank posted a huge net loss of Bt2,837 million in 2006 and a net loss of Bt296 million for the first half of 2007. A crucial problem was the rise in non-performing loans (NPLs), which reduced the bank’s interest income and increased its expenses in the form of additional provisions for possible loan loss. In addition, SME Bank applied the new provisioning criteria released by the Bank of Thailand, caused the bank to set a huge amount of provisions for possible loan losses of Bt3,215 million in 2006 and Bt277 million for the first half of 2007. SME Bank’s ratio of NPLs to average loans jumped from 23% in 2005 to 45% as of December 2006 and 48% as of June 2007. However, 96% of its NPLs were from loans originated before 2006. Rising NPLs also raised the bank’s ratio of non-performing assets (NPAs) to capital funds plus allowances for loan loss from 1.9 times at the end of 2005 to 3.5 times at the end of 2006, which far below the average of 1.1 times for all 14 universal banks and the four special financial institutions (SFIs). The challenge for the bank going forward is to balance its mission as a government-related entity to promote SMEs, while focusing on improving its improve operating performance and operating efficiency with standardized risk management system and practices. If successful, this will help the bank stabilize its strategic position in the event the political environment changes in the future, said TRIS Rating. -- End Small and Medium Enterprise Development Bank of Thailand (SME Bank) Company Rating: Affirmed at AA-Issue Rating:SME087A: Bt5,000 million senior debentures due 2008 Affirmed at AA-Rating Outlook: Stable-------------------------------------------------------Copyright 2008, TRIS Rating Co., Ltd. All rights reserved. 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