Singapore SMEs' plight adds to banks' woes

NPL ratio will reach almost 2% YoY for the whole year, the highest since 2009.

Singapore banks’ non-performing loans (NPL) ratio and credit charges are expected to rapidly rise and surpass levels seen during the 2017 O&M crisis, according to analysts.

Whilst the oil crisis is not expected to directly affect the big three banks’ exposure to the energy sector, it will weigh on small and medium enterprises (SMEs) and subsequently the quality of loans banks have with the industry, according to a report by Moody’s Investors Service. SME loans made up 11% of domestic loans for the local banking system as of June 2019, with the SME NPL ratio at 4.2%.

A spike in SME NPLs seen in 2017 was related to the oil and gas sector.

“By sector, Singapore SMEs that could be affected the most by the economic slowdown made up 25% of total SME loans [held by banks]. These include manufacturing, commerce and services. If the economic situation deteriorates further, a second-order effect will be felt by SMEs in construction (26% of loans) and commodities(37%),” said Moody’s senior officers and analysts Eugene Tarzimanov, Christian de Guzman, and Graeme Knowd.

Amongst the big three banks, DBS is the only one to disclose the amount of loans to SMEs—around 10% of consolidated loans in 2019, data from the Monetary Authority of Singapore (MAS) showed. Of that, more than half is estimated to come from SMEs in Singapore; whilst less than 3% of gross loans are loans to small corporates and retail business.

UOB is the largest SME bank island-wide, which means that it is likely to have more exposure than DBS, noted Moody’s. As of 31 December 2019, loans to small corporates and retail small businesses made up more than 9% of UOB’s total gross loans.

OCBC falls between the two with less than 5% of its gross loans involving the two sectors. Despite this, the bank is the most at risk due to their higher average probability of default (PD) at 13.75% compared to UOB’s and DBS’ 7.4% and 6.7%, respectively.

Overall data on Singapore loans from MAS revealed that corporate small business loans made up 2.6%-6.1% of loans sector-wide, whilst small business loans from the retail book comprised 1.6% up to 3.3%.

More coronavirus blues
The ongoing coronavirus pandemic will also drive the banking sector to record declines not seen since the 2009 Global Financial Crisis, said Maybank Kim Eng analyst Thilan Wickramasinghe in a separate report.

The sector’s 2020E profit after taxes (PAT) is forecasted to fall 15% YoY, whilst domestic loan growth is expected to contract by 1% YoY for 2020—the largest decline and the first ever fall since the GFC, respectively.

NPL ratio is sighted to reach almost 2% YoY for the whole year, the highest since 2009. For the whole year, net interest margins will contract 11bps followed by a 5bps fall in 2021, added Wickramasinghe.

Physical limitations for transacting business arising from social distancing and other anti-coronavirus outbreak measures will keep credit charges elevated at 41bps in 2020 and 35bps in 2021.