Why rising macroeconomic headwinds won't scare Singapore banks' credit profiles

Amid recent release of 2014 financial results.

It has been noted that rising macroeconomic headwinds in 2015 are not likely to be a significant threat to Singaporean banks' credit profiles.

According to a release from Fitch Ratings, the agency believes that cyclical risks to the operating environment for Singaporean banks are rising, notwithstanding the largely stable 2014 financial results released earlier this month.

The ongoing domestic property market correction and slowing economic growth - both in Singapore and other key regional markets - are likely to continue weighing on asset quality and profitability.

Lower commodity prices, if sustained, may also add to pressures in light of potential negative knock-on effects on key countries and sectors of operation such as Malaysia and Indonesia, even as Singaporean banks have limited direct upstream exposures.

Here's more from Fitch Ratings:

Regional expansion remains a long-term strategy for the three local banks - DBS Group, UOB and OCBC - and will weigh on their credit profiles.

Overall loan exposure outside of Singapore has continued to rise to around 53% of total gross loans as of end-2014, up from 49% at end-2013. This was driven partly by OCBC's acquisition of Hong Kong-based Wing Hang Bank, which was completed in August 2014.

Credit costs for Singaporean banks are likely to continue rising from the current cyclical lows, owing to the aforementioned risks and loan-book seasoning after a period of rapid growth in recent years.
Nonetheless, Fitch expects the impact to be manageable, considering the banks' strong capital buffers, adequate profitability, reasonable loan-loss reserves and proven management track records. The average NPL ratio for the three domestic Singaporean banks remains low at under 1%.

Capital positions are likely to stay healthy, supported by the authorities' track record of implementing capital requirements higher than global norms. This will help to underpin the banks' credit profiles through an expected cyclical downturn.

Fully loaded Common Equity Tier 1 (CET1) ratios ranged from 10.6% to 12.6%, with the Fitch Core Capital ratio at 10.8%-12.9% for the three local banks.

Notably, too, the Monetary Authority of Singapore is likely to finalise the list of domestic systematically important banks (D-SIBs) this year. D-SIBs will be required to maintain an additional 2pp of CET1 capital above Basel III minimum requirements. The new regulations should not pose a major challenge for Singaporean banks.

Singaporean banks are also in a good position to comply with the new liquidity coverage ratios, which will be phased in from 2015, given their strong domestic deposit franchises. Average loan/deposit ratios remain largely stable at 86% at end-2014.