Taiwanese lenders are expanding loans to small and medium-sized enterprises (SME) in pursuit of higher returns, but sharp competition and potentially higher credit costs may render the benefits unachievable, Moody’s Investors Service said yesterday.
“The SME business appeals to Taiwanese banks due to the wider interest margins and stronger growth prospects,” the international ratings agency said in a report.
SME loans generated yields of about 60 basis points more than those of large enterprises, reflective of higher credit and operational costs as well as the weaker bargaining power of SMEs, Moody’s said.
First Commercial Bank (第一銀行), E. Sun Bank (玉山銀行), Hua Nan Commercial Bank (華南銀行), Chang Hwa Commercial Bank (彰化銀行), Bank SinoPac (永豐銀行), and Taishin International Bank (台新銀行) have all reported notable gains in SME business this year.
DBS Bank Taiwan (星展銀行) recently entered the arena by offering speedy-loan services that allow SME clients to receive answers within five working days and waivers of remittance fees altogether to broaden its customer base.
The Singaporean lender vowed to become a major SME loan supplier in Taiwan by 2015 after upgrading from a branch into a subsidiary late last year, Kenneth Cheng (鄭克家), head of DBS’ institutional banking, said last week.
SME loans from DBS Taiwan rose to NT$28 billion (US$934 million) last month, compared with a relatively miniscule NT$7 billion in 2008 when it integrated the failed Bowa Bank (寶華銀行), Cheng said.
“The expectation of higher profits may not be realized because SMEs are more vulnerable to economic downturns due to their unpredictable earnings, unstable cash flows and limited financial flexibility,” Moody’s added.
Taiwan’s economy heavily depends on exports and SMEs indirectly contribute to exports by supplying for large manufacturers as part of the supply chain, Moody’s said.
Adverse external developments, such as a sluggish global economy or an economic slowdown in China, could pose downside risks to the earning sustainability of SMEs, resulting in higher volatilities in their financial performance, the ratings agency warned.
SME loans equaled NT$4.07 trillion at the end of last year, accounting for 47 percent of overall corporate loans, Moody’s said.
The Financial Supervisory Commission has encouraged SME lending with quicker approvals for new bank branches and product applications.
In the manufacturing, construction, mining and quarrying industries, SMEs refer to companies with capital of less than NT$80 million or less than employees below 200, based on government definitions.
Firms in other sectors also fall under the classification if their revenues amount to less than NT$100 million or their employee numbers are less than 100.
Banks are unlikely to charge adequate credit premiums to offset the relatively high credit losses amid intense competition, Moody’s said, adding ample liquidity poses another drag.