MAS flags risks from rising corporate debt

SINGAPORE - Singapore banks could see loan quality fall sharply should interest rates rise or if the economy worsens as corporate debt levels are high by historical standards, the city-state's central bank warned on Wednesday.

"Corporates are more leveraged today than they were a year ago as low borrowing costs may have prompted some corporates to borrow more than they would have otherwise," the Monetary Authority of Singapore (MAS) said in its annual Financial Stability Review.

Large firms have issued twice the amount of debt in the first nine months of this year compared with the same period last year, while loans to small- and medium-sized enterprises have continued to expand robustly, MAS added.

"If economic conditions worsen or interest rates rise from current low levels, bank loan quality could deteriorate substantially," the central bank said, although it added companies in the city-state appear well-positioned to cover their interest expenses.

Singapore interest rates are hovering near all-time lows amid a surge in inflows resulting from quantitative easing by Western central banks.

The yield on the 10-year government bond is around 1.36 per cent while bank deposits earn as little as 0.1 per cent per annum, well below inflation that has averaged 4.7 per cent so far this year.

MAS had a more benign view on household debt levels, noting Singapore's household net wealth stood at four times gross domestic product, an increase of 7.3 per cent from a year ago.

Total cash and deposits belonging to households have also continued to exceed aggregate debt, it added.

MAS said government measures since 2009 to pre-empt the formation of a bubble in Singapore's residential market has led to a "noticeable slowdown in the pace of housing loan growth".

Property-related loans, at 46 per cent of outstanding Singapore dollar loans to non-bank customers, is below the average of 48 per cent in the past eight years, it added.

Nonetheless, the central bank said demand for private residential property has remained resilient despite the anti-speculation measures.

"The government will continue to monitor the market closely, and will not hesitate to step in, if and when necessary, to promote a stable and sustainable property market," it added.

NON-SINGAPORE DOLLAR LOANS

MAS's Financial Stability Review, which is published once a year, is aimed at highlighting how developments in global financial markets and Singapore could have an impact on the soundness and stability of the city-state's financial system.

In its assessment of the global financial environment, the Singapore central bank noted that investor sentiment has become more volatile over the past year, which has in turn led to volatile capital flows.

One likely scenario affecting Asia is that the continued accommodative monetary policy in advanced countries will drive more capital into the region, causing a further buildup of risks in the form of excessive leverage and asset bubbles.

But MAS also noted that Singapore banking system's funding profiles and asset quality were sound, and that local banking groups DBS Group, Oversea-Chinese Banking Corp and United Overseas Bank are well capitalised.

The central bank reiterated a warning about the risks arising from the growth of Singapore banks' foreign currency loans which have once again outpaced the increase in non-Singapore dollar denominated deposits.

"Non-Singapore dollar funding risk continues to warrant close monitoring. The growth of non-Singapore dollar loans outpaced the growth of non-Singapore dollar deposits in the past year. Hence, the non-Singapore dollar LTD (loans-to-deposit) ratio rose marginally from 124.0 per cent in Q3 2011 to 124.9 per cent in Q3 2012," the central bank said.

In its report last year, MAS had warned that banks in Singapore were taking a risk by giving out US dollar and other foreign currency-denominated loans and relying on financial markets rather than deposits to back these loans.