New accounting standards pose risks to Singapore banks' profitability

Lenders face higher credit reserve requirement under the FRS109.

The adoption of the local equivalent of the new accounting IFRS 9 standard, FRS 109, could negatively impact the profitability of Singapore banks, according to credit rating agency Moody’s, although lenders remain well-capitalised to withstand steeper credit provisions. 

The FRS 109, coupled with MAS 612, is actually more stringent than the international standard, as banks are required to hold higher amount of credit reserves, a concept absent in IFRS 9.

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“The banks' profitability could become more volatile, as new credit provisions will rise if the macroeconomic environment deteriorates or if more assets are classified as at risk," said Moody’s vice president and senior credit officer Eugene Tarzimanov.

The country’s lenders, however, remain on stable enough footing to withstand the impact of the new accounting standard to capitalisation as they have pre-emptively provisioned their problematic exposures, particularly in the oil and gas sector, ahead of new rules.

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Problem asset coverage remains at healthy levels as reserves cover around 78-91% of nonperforming assets (NPA) for the largest banks - DBS, OCBC and UOB. The formation of new bad loans have eased 63% yoy for DBS, 24% yoy for OCBC, and 1.9% yoy for UOB. The banks have also cleaned up by recognising more NPL during 2H17 due to the transition to SFRS (I) 9 with credit costs dropping to just 13.1bp for DBS, 2.0bp for OCBC, and 13.3bp for UOB, according to an earlier report from UOB Kay Hian.

“Healthy economic growth in Singapore and falling NPL ratios in other ASEAN economies are likely to continue to support asset performance,” Moody's noted.