Singapore’s small and medium enterprises (SMEs) may pose some threat to local banks as rising costs and economic risks would weigh on their risk profile despite budgetary aid for small firms, according to Bloomberg Intelligence.
In her Feb 21 note, credit analyst Rena Kwok says the outlook for Singapore SMEs’ growth appears subdued for 1H2024 on rising business costs and weak demand, especially for those not in expansionary mode. This could be followed by a rebound in 2H2024, premised on a slight recovery in manufacturing and external oriented sectors.
In 4Q2023, the OCBC SME Index posted a reading of 49.5, remaining in contraction for the full year, Kwok points out. The index is based on the transactional data of more than 100,000 OCBC's SME customers in Singapore with annual sales turnover of up to $30 million.
China’s bumpy recovery and lingering geopolitical tensions could weigh on Singapore SMEs in 2024 — even after their payment conduct rebounded sequentially in 4Q2023. Across all industries, the percentage of slow payments by local SMEs fell in the final quarter of 2023, Kwok highlights.
Firms in consumer-led sectors might see continued but moderated growth this year, buoyed by consumption and resilient inbound tourism, says Kwok.
She adds that risks could be partly mitigated by the government's 2024 budgetary support such as the enhanced enterprise-financing scheme and income-tax rebates, which help SMEs cope with higher operating costs and funding needs.
Credit losses in Singapore banks' loans to SMEs — defined as firms with a maximum of $100 million in annual sales — seem manageable despite rising economic headwinds, reflecting broadly improving credit quality, which is a result of tight underwriting.
Kwok believes UOB may gain the most, as its SME exposure is larger than its peers. “Based on their foundation internal ratings based model, built on Basel rules, the average probability of default (PD) for DBS and UOB's SME exposure improved in 2Q2023 versus 4Q2022.
“OCBC's average PD of 10% for its SME loans — which is consistently above peers' — in 2Q23 warrants scrutiny,” she adds.
