Moody's Investors Service says Small and Medium Enterprise Development Bank of Thailand's (SME Bank) deposit and issuer ratings of Baa2/P-2 reflect both the bank's weak standalone financial strength and the very high likelihood of government support. "Our positive ratings outlook also indicates that we expect the bank's credit profile to improve over the next 12-18 months, as a comprehensive rehabilitation plan, which runs through until 2018, is implemented under the direction of the Ministry of Finance," says Simon Chen, a Moody's Assistant Vice President and Analyst. "In addition, we believe SME bank's board of directors' decision last week to appoint a new President underscores the bank's commitment to achieving targets set in this crucial five-year rehabilitation plan," adds Chen. Moody's analysis is contained in its just-released report titled "SME Development Bank of Thailand: Answers to Frequently Asked Questions". The Moody's report concludes that, if implemented rigorously, the several measures contained in SME Bank's rehabilitation plan will have positive effects on its standalone creditworthiness. "Key among these is a THB2 billion capital injection expected from the government by the end of June this year, which will improve the bank's thin capitalization levels and weak provisioning coverage," says Chen, and "the bank will also benefit from compensation for the bank's lending activities under special government programs, as well as from sales of impaired assets and tightened loan underwriting standards," he adds. Moody's report also highlights that, as part of its rehabilitation, the bank will raise long-term debt in the first half of 2014, which would help improve its asset-liability profile and reduce its current dependence on short-term floating-rate debt that exposes it to interest rate risks. Over time, the rehabilitation plan also aims to improve SME Bank's loan underwriting and risk management standards. Moody's report points out that SME Bank's deposit and issuer ratings incorporate eight notches of uplift from its standalone financial strength. The multiple-notch uplift reflects the bank's policy mandate and ownership by the Thai government (rated Baa1 stable). Nevertheless, SME Bank's Baa2 issuer and deposit ratings are one notch short of the government's own, which Moody's says is justified by the higher risk faced by creditors of the bank given the bank's weak standalone profile of the bank and its relatively modest systemic importance. Under Moody's central scenario, banks in Thailand, including SME Bank, will remain resilient despite the political turmoil in the country. The Thai banking system has withstood challenging political conditions and uncertainty in the past; however, Moody's notes that a more pronounced or prolonged period of political turmoil would increase downside risks.