Thanks to the banks’ high capital standards, close regulatory supervision and strong funding franchises.
In a release, Fitch Ratings has affirmed the ratings of three Singapore banks - DBS Bank Ltd., Oversea-Chinese Banking Corp and United Overseas Bank.
High capital standards, close regulatory supervision and strong funding franchises support the current ratings. These features are reasons behind the banks' high-quality capital base and strong reserves, which in turn underpin their loss-absorption capacities. At end-2011, Singapore banks' core Tier 1 capital adequacy ratio (without hybrids) ranged from 11%-12% while non-performing loan reserve coverage exceeded 100%, which were amongst the highest of similarly-rated peers.
Their domestic deposit franchises contribute to ample liquidity and will continue to be a central funding source. Excess Singapore dollar liquidity has been swapped to fund US dollar loan growth, although such reliance has eased somewhat with fresh US dollar deposits from multinational companies and high net worth individuals, and to a lesser extent, new wholesale borrowings. Fitch expects the banks to broadly maintain their overall loan/deposit ratios, which were between 85% and 90% at end-2011.
Singapore banks' ratings could come under pressure from their operations abroad, in the event of rapid growth in less developed markets and concurrent weakening in balance sheets. Nonetheless, the banks have generally been prudent in risk management and expansion thus far, with satisfactory earnings and balance sheet profiles at their overseas operations, including in high-growth countries.
The banks have negotiated credit cycles fairly well, largely due to their satisfactory underwriting, loan book diversity and prudential measures as well as governments' countercyclical measures during adverse periods. Credit costs had only moderated the banks' earnings during economic troughs, while capitalisation has remained strong.
In the medium term, however, downward rating pressure could arise from the growing influence of high-growth higher-risk markets such as China, India and Indonesia on the banks' credit fundamentals, through their regional expansion and these economies' rising interconnectedness with many other Asian economies, especially Hong Kong and Singapore. The impact could vary depending on the geographical mix, economic dynamics over time, the respective banks' balance sheet strengths and track record as well as how the Singapore regulator would be adapting to a changing environment.
Do you know more about this story? Contact us anonymously through this link.