Asset headwinds spell trouble for Singapore banks

OCBC and UOB have both flagged downgrades in some of their corporate accounts.

Quality asset risk amongst banks rose in Q3 as OCBC downgraded two Singapore offshore and transport corporate accounts and UOB’s building construction and oil and gas accounts have been affected, according to a Fitch Ratings report.

“Asset-quality risks are captured in our assessments for the banks’ Operating Environment Midpoints (aa -) which we revised to Negative in May 2019,” said Fitch Ratings’ associate director Priscilla Tjitra and senior director Wee Siang Ng in the report.

In Q3, Singapore banks saw net interest margin (NIM) compression, asset-quality deterioration and slowing loan growth. These trends are also expected to continue with the current quarter’s earnings being at its peak with this cycle. The lagged effect of lower rates and continued competitive pricing will continue to weigh on NIMs.

However, the report also noted that capital and liquidity profiles shall remain strong, countering such risks

Fitch also projects higher credit costs from OCBC, UOB and DBS in 2020, with greater vulnerability in Hong Kong SME loans as DBS Group and OCBC are said to have higher exposure than UOB.

The banks’ impaired-loan ratios in Hong Kong were less than 1% as loans comprised 12-16% of gross loans at the end of September. Singapore’s short-term interest rates have lowered reflecting rate cuts in the US, based on the QoQ narrowing of net interest margin (NIM), which is likely to continue due to lower rates and competitive pricing.