DBS's credit exposure to SMEs more than quadrupled since 2011

Analysts worry if credit selection has been bit aggressive.

SME has been one of the franchise drivers for the bank, along with wealth management, trade finance and treasury customer income.

According to Krishna Guha, equity analyst at Jefferies Asia, the bank has levered up a relatively underutilized deposit franchise, resulting in SGD LDR climbing up from 62% in 2010 to 79% in 2014.

Here's more from Guha:

But given that SMEs in Singapore and HK were probably well banked to begin with, we worry if there has been rather aggressive credit selection on the part of DBS in the cycle.

We find some evidence, as detailed below. DBS and OCBC disclose credit exposures of small businesses under Basel Pillar 3 quantitative statistics. UOB also does but the bank combines small business exposure along with corporate credit exposure.

So we cannot use UOB for comparison. Further, DBS has also started following UOB’s norm from 2014 but we can get some insights from growth from 2011 to 2013 and comparing that against OCBC.

DBS’s small corporate credit exposure has grown at 112% CAGR compared to 6% for OCBC. Overall credit exposure has grown at a CAGR of 10% for DBS and 14% for OCBC.

DBS’s risk weights for small corporate credit exposure have increased countercyclically from 69% to 94%. This is quite surprising and is the only category of credit exposure that has seen an increase in risk weights among the three banks in this cycle.

For OCBC, risk weights have decreased from 46% in 2011 to 40% in 2014. But on a positive note, this also means that the risky growth has been accompanied by a corresponding capital cushion.

We also note that DBS’s small corporate credit exposure is under Foundation IRBA while that of OCBC is under Advanced IRBA. This in itself is not a bad thing. 

If the book is relatively unseasoned, it is better to be under Foundation IRBA, but the fact it is unseasoned along with the explosive growth makes us uncomfortable .