Sin­ga­pore banks to be hit by de­clin­ing as­set qual­ity, weak­en­ing prof­itabil­ity

Sol­vency is­sues are weigh­ing heav­ily on the Sin­ga­pore bank­ing sec­tor but op­ti­mists in­sist the worst is over, es­pe­cially with banks’ solid cap­i­tal­i­sa­tion that is ex­pected to keep them afloat this year.

Singapore Business Review - - INDUSTRY INSIGHT 1: BANKING -

When credit rat­ing agency Fitch Rat­ings down­graded its sec­tor out­look for Sin­ga­pore banks to “neg­a­tive” last De­cem­ber, it warned that softer macroe­co­nomic con­di­tions and a more chal­leng­ing op­er­at­ing en­vi­ron­ment would pum­mel the sec­tor in 2017. “This could place broad­en­ing pres­sure on as­set qual­ity and dampen earn­ings,” says Mark Young, head of Asia-pa­cific banks at Fitch Rat­ings.

How­ever, Fitch Rat­ings main­tained “sta­ble” out­looks for Sin­ga­pore banks, sup­ported by solid credit pro­files char­ac­terised by steady fund­ing and liq­uid­ity po­si­tions, strong loss-ab­sorp­tion buf­fers, and healthy prof­itabil­ity. Sin­ga­pore banks will be most wary of the trou­bled oil & gas (O&G) sec­tor in 2017, which will likely con­tinue to ex­ert mod­er­ate pres­sure on as­set qual­ity. “Pro­longed eco­nomic weak­ness could lead to broader as­set-qual­ity risks which may also af­fect small- and medium-sized busi­nesses. How­ever, we be­lieve the down­side risks to be man­age­able,” notes Young.

Young es­ti­mates that Sin­ga­pore banks’ com­bined ex­po­sure of S$16.1b (US$11.2B) to the dis­tressed offshore sup­port ser­vices sec­tor ac­counted for 17% of their core eq­uity Tier 1 cap­i­tal at end-sep­tem­ber 2016. “As­set qual­ity con­tin­ues to de­te­ri­o­rate across banks with weak­ness still com­ing from the O&G sup­port ser­vices,” he says.

De­te­ri­o­rat­ing sol­vency met­rics – namely as­set qual­ity and prof­itabil­ity – led Moody’s In­vestors Ser­vice to down­grade base­line credit as­sess­ments (BCA) for the three Sin­ga­porean banks – DBS, OCBC, and UOB – last De­cem­ber. “The on­go­ing credit chal­lenges that these banks face at home and broadly in Asia – where around 50% of their loans are – have trans­lated into higher prob­lem as­sets this year, and Moody’s ex­pects fur­ther neg­a­tive pres­sure on as­set qual­ity in 2017 to cre­ate down­ward pres­sure on prof­itabil­ity due to higher credit pro­vi­sions,” says Eu­gene Tarz­i­manov, vice pres­i­dent, se­nior credit of­fi­cer, fi­nan­cial in­sti­tu­tions group, Moody’s In­vestors Ser­vice.

DBS, for ex­am­ple, saw its prob­lem loan ra­tio rise to 1.3% at end­septem­ber 2016 from 0.9% a year ago, mainly due to as­set qual­ity is­sues from its offshore & ma­rine sec­tor ex­po­sures, in­clud­ing Swiber Hold­ings Ltd., a large Sin­ga­pore-based ser­vices com­pany that de­faulted on its bond re­pay­ment and filed for ju­di­cial man­age­ment in Au­gust 2016. Then in Novem­ber 2016, DBS in­di­cated that its re­main­ing oil ser­vices ex­po­sures with po­ten­tial as­set qual­ity weak­ness

Moody’s ex­pects fur­ther neg­a­tive pres­sure on as­set qual­ity in 2017 to cre­ate down­ward pres­sure on prof­itabil­ity due to higher credit pro­vi­sions.

Banks will spend 2017 lick­ing profit wounds

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