DBS most at risk from Euro woes

Around 30% of its loan book is exposed to SMEs at risk of order cancellations from European clients.

In an article from BangKok Post today on SME SMEs that export to Europe asking for loan extensions due to tighter cash flow, affected SMEs indicating orders from Europe have declined by about 20% thus far.

According to Nomura, with their weaker balance sheets and greater susceptibility to cost pressures / input price volatility, export-oriented SMEs were always going to be the early-warning “canary in the coalmine” as far as how quickly and severely the EU crisis is impacting ASEAN. Including the knock-on effects from a renewed weakening in the US and China economies, banks with SME exposures are most at risk of NPL pressure (as well as related loan growth deceleration), said Nomura.

Regarding Singapore Bank exposure, here's what Nomura analysts had to say:

The more immediate impact from the export slowdown will be decelerating trade finance credit growth –
there is a good chance impending 2Q12 USD loan q-q growth could be flat-to-negative for the sector, in our view, especially as a sharp slowdown was already evident in 1Q12 results.

We believe the banks most at risk are DBS (USD loans are 30% of loan book) and OCBC (24%) – UOB has less than 15% of lending in USD. Asset quality concerns will take longer to materialize (there is always a lag vis-a-vis economic data) – we have more comfort with the ASEAN-centric SME lending from UOB and OCBC, as opposed to the less-transparent HK/China-centric SME lending from DBS (30% of DBS assets are in Greater China).

Hence, investors seeking a defensive posture against SME-related loan growth and asset quality disappointments are recommended UOB SP.