Apr 17, 2014

    Banks court regional SMEs while waiting on S'pore Inc

    THE proposed bid for Wing Hang Bank by OCBC Bank prompts a closer look at the way the three homegrown lenders are gunning for small and medium-sized (SME) businesses on a regional level, especially as SMEs here are more preoccupied with cost than expansion.

    Growth from the SME market in Asia is clear: bank revenue from SMEs in this region stood at about US$80 billion (S$100 billion) in 2010, and should more than double by next year, showed a McKinsey study that was cited by DBS Group Holdings late last month.

    DBS said in its annual report that growth in its treasury customer income last year was mainly driven by Hong Kong SMEs hedging their yuan requirements at favourable offshore rates.

    The self-professed laggard in SME lending in its own backyard is also growing at a steady clip. Last year, its income from its total SME segment rose 11 per cent over the year to $1.37 billion - with most of it from Hong Kong and Singapore. It expects to grow at the same rate this year.

    Now, with OCBC making its $6.2 billion bid for Hong Kong's Wing Hang, it is digging its heels into the China-linked trade financing space. This is especially apparent once the deal is stacked against OCBC's earlier proposal to raise its stake in Bank of Ningbo, which is strong in trade financing, and SME lending.

    United Overseas Bank (UOB) is also eager to tap into Asian trade, setting up a foreign exchange advisory and trading unit last month that specifically caters to SMEs. But unlike DBS and OCBC, it has been concentrating on trade closer to home.

    Over half of the profit from its small businesses unit last year came from South-east Asia, including Malaysia, Thailand and Indonesia, its annual report showed. This unit - which did not break out its earnings - posted double-digit growth last year.

    The banks' regional push comes as Singapore SMEs are caught up with cost concerns, and are catching up with the Government's productivity movement.

    Other parts of the world and, in particular, China are worried about rising costs too, but the pressure over productivity seems more acute here.

    The Singapore Business Federation's SME survey last year showed that cost reduction dominated the priorities of SMEs here.

    Meanwhile, growth in Sing-dollar business loans - most of which go to the construction, finance, and trade-related industries - has eased for three straight months since December.

    To be sure, banks will keep tabs on their turf, and not just for home advantage. For one thing, they are still seeing some growth.

    OCBC, which competes head-to-head with UOB in targeting small enterprises, said its SME loan portfolio in Singapore last year had grown, though it held steady at 19 per cent.

    And while counter-intuitive, DBS is eager to help SMEs save money. It has rolled out a working capital advisory programme to help SMEs unlock trapped cash. The bank wants to acquire clients and build its SME base - the service is free, but SMEs need to have a DBS banking account.

    At the heart of it all, as SMEs here undergo a painful time of restructuring, the effort is aimed at raising the quality of SMEs, which works in the banks' favour. Against tougher regulations that cast a bigger spotlight on risk weightage, banks have to be picky on SMEs.

    Analysts now expect some mergers and acquisitions among SMEs here this year, which could lead to bigger, better SMEs.

    Meanwhile, the Government will now take up the bulk of risk for micro-loans taken by young companies, as announced in the Budget this year.

    Spring Singapore told BT that its financing schemes are targeted at higher-risk borrowers. It disbursed $1.25 billion in loans last year - down slightly from $1.3 billion in 2012 - though it threw its weight behind 14 per cent more SMEs over the year.

    With this, Singapore banks can still keep some skin in the game. And in time, home-grown lenders should be able to tap a pool of more solid Singapore-based SMEs that have the mettle to expand into regional powerhouses.

    When that will come to pass is harder to say, though it must, eventually. For if the productivity push fails, Singapore will have a bigger problem - at 99 per cent, to be exact.