SMEs new credit source

Source From (The Star Online): http://biz.thestar.com.my/news/story.asp?file=/2012/5/21/business/11328025&sec=business

Published: on 21 May 2012

Business lending on the rise with roll-out of ETP jobs
PETALING JAYA: With consumer loans under pressure from the new lending guidelines, banks are tapping a new source of credit growth in lending to small and medium enterprises (SMEs).

Business banking is the next trend to watch as banks get prepared to finance the smaller jobs under the Economic Transformation Programme (ETP) and contract financing by SMEs.

“Consumer loans will still be the biggest contributor to income,” said Affin Bank chief corporate strategist Nazlee Khalifah. “But SME lending will be more prominent in almost all banks' portfolio at least for the next three to five years under ETP jobs and contract financing.”

“Affin is looking at more SMEs to beef up our contract financing business,” Nazlee told StarBiz.

 

“Previously, we were focussing on corporate which is the safer side of lending. We were in a recovery stage then. But now that we are on more stable footing, we can be more aggressive and take a bit more risk.”
The margins in business banking are slightly higher than in corporate banking and help to counter the fall in consumer margins.

The jobs involved are mainly small to mid-sized of around RM10mil to RM20mil each. The source of payment is secured and usually prompt upon completion of the job, as specified. These companies are mainly assessed based on their capability to perform the jobs, and are likely to be already known to the banks.

“The consumer loans market has become crowded,” said Pong Teng Siew, head of research at Interpac Securities. “The property market may experience a peak, after which it may slow down or flatten off.”
Business loans are more capital intensive - the capital allocated to support such lending is usually higher than for consumer loans. They are also more difficult to tap than consumer loans.

 

OCBC Bank sees the way forward not just in the building up its business banking business - the bank is said to be beefing up its contract financing unit - but in drawing up a diversified portfolio. “Banks should aim to build diversified portfolios as the revenue prospects and risk profiles of different loan/business segments can counter-balance one another,” said OCBC Bank Malaysia country chief risk officer Choo Yee Kwan.

As an example, corporate lending and project financing are largely cash flow-based whilst lending to the small and medium-sized businesses are mainly on secured basis.

Within consumer lending, residential mortgage financing is a secured portfolio whilst personal financing and cards are largely extended on an unsecured basis.

To complement corporate lending, project/contract financing, SME and consumer lending, banks will add on growing opportunities in treasury business, investment banking, wealth management plus other structured products for both individuals and businesses.

It will bring additional opportunities if banks are able to distribute bancassurance/ unit trust products and offer Islamic financing products and services.

Banks that have regional networks would be able to provide their customers with cross-border support, particularly in foreign locations where the bank has subsidiaries, branches or offices on the ground.

Choo: ‘A diversification approach to loan exposures/ revenue opportunities avoids portfolio concentration risks.’

 

“A diversification approach to loan exposures/revenue opportunities avoids portfolio concentration risks,” Choo said.

Within consumer banking, there could be some diversification between residential mortgage lending (on secured basis but there has been spread compression in the industry) and personal loans which are typically unsecured but the returns currently appear to be better.

However, growth may not be a priority anymore as we could be in the stage of the credit cycle which involves margin preservation and monitoring of asset quality, said an analyst from a foreign research house.

Other areas of credit growth involve ways to improve non-interest income which are basically non-capital intensive revenue opportunities. “Foreign exchange is an obvious area for hedging opportunities,” the analyst said.