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.
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.
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