The credit quality of Oversea-Chinese Banking Corporation’s (OCBC) O39 loans for small- and medium-sized enterprises (SMEs) could be a risk to the bank, says Bloomberg Intelligence credit analyst, Rena Kwok.
SMEs are defined as firms with annual sales of $100 million and below.
“Default trends will have to be watched as SMEs’ loan payment in Singapore weakened further in 2Q2023 amid economic risks,” Kwok writes, noting that OCBC’s SME loans are weaker compared to its peers.
“A continued uptick in slow payments across most sectors in Singapore in 2Q2023 could signal that SMEs are facing tighter cash flows as the business environment weakens amid macro headwinds,” Kwok adds.
During the quarter, SMEs in the manufacturing and wholesale sectors reported a higher percentage of slow payments with manufacturing firms increasing by 0.68% y-o-y and 0.26% q-o-q. Slow payments from wholesale firms rose by 0.72% y-o-y and 0.12% q-o-q.
To this end, payments by manufacturing and wholesale firms, which are more impacted by external factors, may face added pressure this year, says Kwok.
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Amid the recovery in the travel sector, the analyst also sees firms conducting tourism services as well as other related services running out of steam in the 2H2023.
That said, risks may be partly offset by the extension of an enterprise-financing scheme and an energy-efficiency grant in Singapore’s 2023 Budget to assist local SMEs.
Banks’ asset quality may worsen only ‘slightly’
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Despite the headwinds, Kwok notes that asset qualities among Singapore banks may worsen only “slightly”.
The rates of recovery for the banks’ nonperforming assets (NPA) and new NPA formations are key asset quality indicators in the 2H2023 as credit rises with slowing global growth, China’s weaker-than-expected expansion and higher interest rates, writes Kwok.
“Still, Singapore banks' gross non-performing loan (NPL) ratios may stay benign in 2H2023 -- even as they could weaken to close to pre-pandemic levels -- thanks to tight risk controls. Efforts by the lenders to boost management overlay look sufficient to buffer any credit losses,” she says.
She adds: “Although systemic pressure in their loan books is unlikely, pockets of stress might emerge in riskier segments such as vulnerable SMEs, especially those in externally-focused sectors.”
For the 2QFY2023 ended June, the NPA formation for all three Singapore banks – DBS D05 , OCBC and United Overseas Bank (UOB) U11 – was below the average reported for the FY2022.
At present, credit losses from SMEs look “modest” despite the rising macro headwinds.
This reflects the banks’ broadly improving credit quality as a result of tight underwriting, Kwok points out.
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“But pockets of stress might arise, especially among borrowers in externally-reliant sectors as global growth slows. This may be partly offset by the extension of some support initiatives in the city's 2023 budget,” she adds.
Among the banks, UOB may gain the most from the initiatives given that its SME exposure is more significant than its peers.
“According to their foundation internal ratings-based (FIRB) model, built on Basel rules, the average probability of default (PD) for DBS's and UOB's SME exposure improved in 2QFY2023 versus 4QFY2022,” says Kwok.
“In contrast, OCBC's consistently-above-peers average PD of 10% for its SME loans in 2QFY2023 warrants scrutiny,” she reiterates.
Shares in DBS, OCBC and UOB closed at $34.24, $12.90 and $29.20 respectively on Sept 15.
