Singapore banks can fend off challenges to asset quality, says S&P

Singapore banks can fend off challenges to asset quality, says S&P


THE financial strength of Singapore banks will be tested this year as asset quality deteriorates and non-performing loans (NPLs) edge up, Standard & Poor's (S&P) said in a report released on Wednesday.

But the credit rating agency believes that the three well-capitalised banks have sufficiently solid financial profiles to endure the difficulties and maintains "AA-" long-term issuer credit rating on all three banks.

While flagging that these banks are in for a bumpy ride in 2016 as slowing loan demand and vulnerable asset quality takes centre-stage, S&P stressed that the loan-loss reserves of Singapore banks is at over 100 per cent of problem loans - hence providing some cushion against asset-quality pressure.

"In our opinion, 2015 was the turning point in the credit cycle, and NPLs will continue to rise in 2016," S&P said. "Our base case, however, assumes a gradual deterioration, rather than a sharp spike in delinquencies."

Still, shares of Singapore banks have been badly bruised by worries over their exposure to the troubled oil and gas sector. Year-to-date, DBS, OCBC and UOB counters have slumped 18.5 per cent, 11.6 per cent and 12.3 per cent, respectively.

But S&P noted that Singapore banks have good buffers and proactive risk management to fend off asset-quality challenges. NPL ratios are also coming off a low base of one per cent in the third quarter of 2015.

Singapore banks' exposure to oil and gas companies, which along with commodities finance, accounts for 6-10 per cent of their total bank loans, based on S&P estimates. But a large proportion of that exposure is to government-owned companies or those that are part of large conglomerates with strong balance sheets that can weather near-term downside risks.

Exposure to Greater China is more significant, making up about 35 per cent of the loans for DBS, 28 per cent for OCBC and 12 per cent for UOB, S&P said. Trade finance loans account for a significant part of the China exposure. "In our opinion, the credit risk is manageable because these facilities are short-term, typically with a maturity of three months or less, and secured against underlying collateral," it said.

Though trade finance loans have grown very rapidly especially during 2013 when the interest rate on offshore yuan was significantly lower than onshore yuan, the differential gap has shrunk considerably since China tweaked its exchange rate policy in August 2015. As a result, the volume of trade finance loans to China will likely stay subdued, S&P said.

Now, ASEAN's economic and population growth vis-a-vis that of developed countries has made the former seem attractive for banks looking for higher yields. But S&P observed that as the higher growth potential of emerging markets is overshadowed by the higher cost of credit risks arising from lower per capita incomes and weaker payment cultures, Singapore banks are likely to be cautious about overseas expansion this year.

The credit rating agency is forecasting a moderate loan growth of 3-5 per cent for Singapore banks this year. "Further improvement in net interest margins is the key to stable earnings for banks in 2016. Higher margins should be weighed against potential deterioration in asset quality as customers grapple with higher borrowing costs," S&P said. "Overall, we expect only modest profit growth in 2016 on higher loan provisions and lower interest and non-interest income."

This article was first published on February 18, 2016.
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