Singapore banks slated to cut capital buffers as they seek growth

Banks have set plans to do so, says S&P.

Singapore banks are likely to cut back on their capital buffers and have already set in motion short to medium-term plans to manage this, said S&P Global Ratings.

Singapore banks have implemented capital distribution plans to pare back excess capital over the next two to three years, via periodic share buybacks, and special dividends, it said.

“We expect management will return capital prudently, and scale back or halt it completely if loan growth picks up or other opportunities emerge,” said S&P’s Singapore primary credit analyst Ivan Tan.

Loan growth in Singapore's banking sector rose to about 5% in 2024, from a 3% contraction in 2023. Loan growth is projected to come at 5%-8% in 2025 and 2026.

If it reaches the upper range, it will allow banks to use excess capital to partly alleviate the need for capital intervention, Tan said.

Banks’ capital ratios were boosted following Basel reforms in July 2024 and are now double the capital requirement. This healthy capitalization protects against unexpected losses and instils public confidence.

However, very high levels could indicate that a bank is not effectively using its capital for growth and expansion, S&P said.

A war chest of capital could also spur Singapore banks to sharpen their hunt for overseas acquisitions, Tan said.

“Singapore banks have made a string of bite-sized, bolt-on acquisitions in recent years to strengthen their regional footprint. For example, Oversea-Chinese Banking Corp. Ltd. recently acquired Bank Commonwealth PT to augment its Indonesian franchise,” he said.

“We believe Singapore banks will manage this capital transition such that at the end of five years, their fully phased in Tier 1 capital ratio will revert to historical norms of about 15%,” he concluded.