BANKING THREAT
Singapore warns muted regional growth poses increased credit risks.
SINGAPORE: The city state’s central bank yesterday warned that subdued regional economic growth is posing increased credit risks for Singapore’s banks, but it said the financial system remains resilient in the face of external headwinds.
Highlighting growing challenges facing global policymakers, the Monetary Authority of Singapore (MAS) also cautioned that divergent monetary policies across the United States, Japan and Europe could stoke financial excesses as traders search for higher returns.
“Uncertainty over US monetary policy could trigger higher market volatility, while accommodative policies in the euro zone and Japan could fuel search for yield and financial excesses,” the MAS said in its annual Financial Stability Review.
It said subpar growth in Asia could pressure profits and the debt-servicing capacity of businesses, with the turning credit cycle leaving banks exposed to risks of bad loans.
“Asset quality remains healthy, but there are signs of increased credit risks,” the review said.
The domestic banking system remains resilient against a backdrop of an uncertain external environment, the MAS said.
“Banks have strong capital and liquidity buffers to withstand severe shocks but continued vigilance is warranted,” the report said.
The overall non-performing loan ratio increased to 1.5% in the third quarter of 2015 from 1.1% a year ago.
“Banks’ corporate loan portfolios face increased vulnerabilities as subdued regional growth could hit the profitability and debt-servicing capacity of corporates in Asia,” the MAS said.
The MAS said household balance sheets have remained firm on aggregate, with household net wealth — the difference between household assets and debt — totalling S$1.5 trillion (US$1.06 trillion) in the third quarter. Defaults on consumer loans have been low, it said.
However, the impending interest rate normalisation, coupled with headwinds in the external outlook and slower domestic growth, pose downside risks to the household sector, especially for the highly leveraged, the central bank said.
Michael Wan, an economist for Credit Suisse, said the risks from leverage were “slightly more acute” for households in Singapore than for the corporate sector.
“The good thing is that over the past, say, one-and-a-half years or so, the growth rate of household debt has come down quite a bit,” he said. “I don’t personally think that it’s going to be a widespread default kind of issue.”
Highly leveraged firms in certain sectors could be vulnerable if interest rates rise or earnings weaken further, while those with foreign currency exposures should guard against currency market volatility, the MAS said.