The news out of the banking sector has not been good of late - wage cuts, retrenchments, shuttering of certain businesses, falling share prices.
One shocker of a recent headline even had a Swiss fund manager predict that a massive banking crisis would hit Singapore's shores.
The gloomy news flow comes amid a backdrop of plunging oil prices, a slowing Chinese economy and turbulent financial markets.
These have triggered restructuring exercises involving thousands of worldwide job cuts and billions of dollars of capital-raising at global banks.
Indeed it is fair for anyone to wonder whether Singapore's banking sector is in real trouble.
THE RISKS AHEAD
In its latest Financial Stability Review released in November last year, the Monetary Authority of Singapore (MAS) warned that pockets of risks are emerging amid slowing growth and rising interest rates.
"The credit cycle has begun to turn, with external and domestic loan growth moderating alongside slowing economic growth," the MAS said. "This poses risks to Singapore's banking system. Asset quality remains healthy, but there are signs of increased credit risks, for example, a slight uptick in non-performing and special mention loans."
Furthermore, the MAS added, corporate earnings in Singapore have weakened over the past year amid an uncertain operating environment. While corporate balance sheets remain healthy overall, highly leveraged firms in certain sectors could be vulnerable if interest rates rise or earnings weaken further. Firms with foreign currency exposures could also face increased foreign currency mismatch risks should currency market volatility persist.
The latest fourth-quarter financial results of the three local banks - DBS Group, United Overseas Bank and OCBC Bank - show that the sharp fall in oil prices has already had an impact. OCBC, for example, said its non-performing loans (NPLs) rose 54 per cent to $1.97 billion last year, with all net new NPLs coming from oil and gas customers. Chief executive Samuel Tsien added at a results briefing last week that about 47 per cent of the bank's $12.4 billion oil and gas portfolio is under stress.
UOB's non-performing loans rose 22 per cent to $2.9 billion as of December, with the transport, storage and communications sector recording the highest amount of non-performing loans at $977 million. Oil and gas loans are classified under this category, The banks acknowledged that if oil prices stay low for much longer, their loan books will feel even more pain. DBS chief executive Piyush Gupta, for example, said that if oil prices stayed at US$20 for the next two years, its oil and gas loans will come under stress, and that the bank would have to write off $150 million to $200 million.
Since the 2008 financial crisis, Singapore's three lenders have ramped up their regional presence, making them that much more exposed to external headwinds. Major downturns in markets where they are active, such as Indonesia and Malaysia, whose economies have been affected by slumping commodity prices and slowing trade with China, will put more pressure on their loan books. The slowing of the Chinese economy could also affect the banks' loans to clients there.
So far, there has not been much damage yet. At DBS and OCBC, China NPL ratios are lower than their overall ratios, and all three say that bad debts in Greater China will likely be manageable as most of their exposure in the market is to state-owned enterprises and top-tier banks.
That might come as cold comfort to those who read the dire warning from Swiss hedge fund manager Felix Zulauf that the Chinese economy will suffer a hard landing, triggering a banking crisis here. Singapore's banking sector has attracted a high volume of foreign capital over the years, but this capital will rush out if the Chinese economy slows sharply, he said.
But while bankers and analysts here acknowledge there are risks, they are sceptical things could get that bad. Speaking at DBS' results briefing on Monday, Mr Gupta said the banking sector is not facing a crisis like the kind that ensued after investment banking giant Lehman Brothers collapsed in 2008. "Not withstanding what you might hear from hedge fund managers from Switzerland, Singapore is not a basket case." After all, he noted, Singapore is one of few economies in the world with the top sovereign credit rating from all three ratings agencies, it continues to hold massive amounts of foreign currency reserves and it has maintained a current account surplus for the past decade.
This current account surplus means that Singapore has long been a capital exporter anyway, noted Bank of America Merrill Lynch economist Chua Hak Bin, so capital outflows are nothing new. "Capital is flowing out to be invested overseas, by Temasek Holdings, GIC and also individuals. There's always capital outflow, which is a function of Singapore's high savings."
Deloitte South-east Asia financial services industry leader, Mr Ho Kok Yong, noted that banks here maintain capital ratios well above the levels required by the Basel III global capital standards. "This, coupled with our robust regulatory framework and strong macro-prudential measures, definitely helps to minimise risks arising from the headwinds to come," he added.
BIG THREE IN GOOD SHAPE
Although the local banks warned that worsening economic conditions will likely cause further deterioration in asset quality, they also showcased strong balance sheets, cushioned by thick capital bases.
What is also reassuring is that they have been open and transparent about how vulnerable their portfolios are. All three, for example, revealed their loan exposures to the oil and gas industry.
Analysts remain relatively upbeat about the outlook for the banks. Moody's Investors Service analyst Eugene Tarzimanov said: "Some balance sheet metrics , like asset quality and profitability, will see some deterioration this year, but those are just two pillars of banking. We expect stability in the other pillars - capital, funding and liquidity. So even if you have NPLs going up and profitability going down, you have to take into context the broader strength that Singapore's banks have."
That stability in funding and liquidity comes from the strong deposit bases that the three local lenders enjoy domestically, Mr Tarzimanov added.
Another factor working in favour of Singapore's three local lenders is the fact that they have fewer legacy issues to resolve, unlike many big global players.
Many of these international banks expanded rapidly into emerging markets such as Asia and the Middle East over the past decade, only to find that they have over-extended themselves, and now have to make major cutbacks as business conditions have dramatically worsened. Standard Chartered said in November it would axe 15,000 jobs and raise US$5.1 billion (S$7 billion) after posting a shock quarterly loss.
Barclays last month shut its securities operations across Asia. Deutsche Bank unveiled in October a plan to exit from 10 countries and cut 9,000 jobs as part of a sweeping overhaul. The list goes on. Inevitably, these strategic clean-ups have affected the Singapore operations of such banks and will likely continue to do so.
Foreign banks operating here depend more on funding from financial markets and from their parents in Europe or the United States than on local deposits. If markets are volatile, as they have been for several months now, or if their headquarters are tightening their belts, that could mean tighter liquidity and funding conditions for the Singapore operations of foreign banks.
As gloomy as that all sounds, the situation is not catastrophic for Singapore.
"We should not overstretch the extent of the problem. Foreign banks such as HSBC, Citi and Standard Chartered, are part of global banking groups. Even if they are scaling down, they still see Singapore as a core market and we don't think they would retract materially from Singapore," said Mr Tarzimanov of Moody's.
The MAS' own assessment is that "Singapore's banking system remains resilient amid an uncertain external environment". Banks have strong capital and liquidity buffers to withstand severe shocks but "continued vigilance is warranted", it said in its Financial Stability Review.
Most households and companies will still be able to service their debt payments even as interest rates climb or corporate earnings decline, it added.
No doubt, there is little to cheer about in the global economy and the end of the tunnel is still miles away. For banks - and their corporate clients across most industries - things will get worse from here.
If it's any consolation, the deterioration will not happen all at once, and the local banks are facing the headwinds to come from a position of relative strength.
It is not time to panic just yet, but it is a good time to start paying closer attention to banks' financial results.
This article was first published on Feb 24, 2016.
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