Rising SME loan risks may lift banking sector credit costs
KUALA LUMPUR: Rising risks within the small and medium enterprise (SME) loan segment could marginally increase overall credit costs for the banking sector, according to CIMB Securities Sdn Bhd.
The firm said that assuming the probability of default (PD) for SME loans rises to 6.0 per cent from 4.5 per cent, while maintaining the loss given default at 50 per cent, estimated credit losses for the SME portfolio may need to be raised by 75 basis points (bps) amid a slowing growth environment.
"On an overall basis, this translates to a 12 bps increase in sector credit costs, as SME loans currently account for 16.5 per cent of total loans," it said in a note.
However, CIMB Securities noted that this projection remains within its earlier assumption of a 15 bps increase in sector credit costs and therefore it is maintaining its current credit cost assumptions for now.
On historical credit cost trends, the firm said credit costs typically increase in times of slower gross domestic product (GDP) and export growth.
It stated that during normal economic cycles, credit costs tend to range between 20 20bps and 30bps, while favourable conditions usually see benign levels of 10–20 bps.
However, in slower growth cycles, credit costs often climb above 30bps to between 40bps and 50bps.
"The most recent recession during the 2020 Covid-19 pandemic caused a significant jump in credit costs to 79bps in 2020, coinciding with a 5.5 per cent year-on-year (YoY) decline in GDP and an 8.6 per cent YoY drop in exports.
"Prior to that, during the 2008 recession, credit costs peaked at 70bps as GDP declined by 1.5 per cent YoY and exports contracted by 10.9 per cent YoY," the firm added.
While direct trade-related loans remain insignificant, accounting for just 1.0 to 4.7 per cent of total loans for banks under its coverage, CIMB Securities said larger impacts are likely to emerge from secondary spillover effects on trade-related supply chain vendors and suppliers.
"The initial segment that may face some risk is likely to be the SME segment, which currently accounts for 16.5 per cent of total loans on average for the banks under our coverage," it said.
CIMB Securities remains "neutral" on the banking sector and maintained its "buy" call on Alliance Bank Malaysia Bhd, Public Bank Bhd and RHB Bank Bhd as dividend yields remain attractive at current levels.
The firm said the key upside risks include lower credit costs, higher net interest margins, and non-interest income bond gains.
Meanwhile, key risks include higher-than-expected cost of funds, liquidity outflow and worse-than-expected asset quality.
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