ASEAN Financials - SMEs in trouble - is the government helping?

SMEs in ASEAN have been seeing signs of stress given the weak economic backdrop. In some countries, SMEs have accounted for the bulk of new NPL formation in recent quarters. In particular, banks in Thailand and Indonesia have been the mostaffected given their larger exposureto SMEs. Indonesian banks havec. 26% of their loan portfolio in SMEs while Thai banks have c. 23%.

■ Singapore and Malaysian banks are next with c.20% and c.17%, respectively. As shown in Exhibit 1, in general banks with higher exposures to SME loans have had larger increase in NPL over the past year and we expect that a prolonged period of subdued economic growth will mean NPLs remain elevated.

■ There are some exceptions to this pattern, OCBC and CIMB saw a bigger pick up in NPLs despite their relatively lower SME exposures. At OCBC, the increase was mainly due to its precautionary NPL classification related to O&G while in CIMB the increment was attributable to its coal exposures at CIMB Niaga.

As the economy is expected to remain sluggish going into 2016, we anticipate banks are likely to be more selective in extending SME loans. This could in turn make things worse. In its recent FSR, MAS noted that if credit tightens further, SMEs could find it more difficult to access bank credit and face working capital shortfalls.

In Thailand, the government has extended various stimulus packages to boost SME sectors such as the soft loans programme and a loans guarantee scheme by Thai Credit Guarantee Corporation (TCG).The Malaysian government also included various SME programmes in the 2016 budget. In Indonesia, the government has implemented Kredit Usaha Rakyat (KUR) to boost micro loans and entrepreneurship though the main focus is on micro lending (see Exhibit 2 for details on government support program). In our view, these government initiatives are positive for the SME segments in tough times though it might take sometime for the effect to flow through. However, there are possible NIM threats. In particular, we think the KUR program could have net negative impacts on Indonesian banks due to potential cannibalization of the more profitable commercial micro loan and could potentially lead to margin compression, especially at BRI. In Thailand, the TCG scheme will add to NIM pressure, but also boost volumes.

■ As highlighted in our November 13, 2015 note, ASEAN Banks' Credit Quality - what 3Q15 told us, what we see in 2016, we expect credit quality concerns to persist into 2016 and continued pressure on earnings forecasts for the sector will remain. (Read Report)

Source : Morgan Stanley Research

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