Fitch says Singapore banks can fully absorb asset-quality shocks through their earnings alone, thereby leaving a limited impairment risk on capital.
A stress test revealed such resilience through previous business cycles, and the Rating Outlook is hence Stable.
In a recessionary environment, Singapore banks' non-performing loan ratios are assumed to peak over a two-year period to 10%-11% by end-2013 from an average 1.2% at end-2011. The banks' pre-provision profit - which Fitch has also stressed downwards - is enough to cover "stressed" credit costs, which together with those of non-loan assets would hypothetically rise to 2.3%-2.5% of loans annually.
Furthermore, with earnings fully covering credit costs, Singapore banks should remain well capitalised.
This stress test also corroborates Fitch's view that the need for extraordinary state support for the banks - as seen in some other developed countries during the 2008-2009 global downturn - is remote. This supports the banks' 'aa-'Viability Ratings, which are amongst the highest of banks globally. Their core Tier 1 capital adequacy ratio, excluding hybrids, is likely to stay around current levels, which ranged from 11%-12% at end-March 2012.
The aforementioned findings do not represent Fitch's forecast for Singapore banks, as this stress test is a broad-based exercise and gives little benefit to the banks' satisfactory risk management, actual recovery potential on NPLs and other possible mitigating measures in a difficult environment. In reality, the agency expects Singapore banks to remain profitable in 2012, with impairment charges likely to rise to only 70bp (2011: 40bp), which are well below the levels under "stressed" conditions.
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