Fitch confident about Singapore banks’ resilience

Nonetheless, a severe and/or protracted global recession that adversely affects Asian economies, in turn resulting in heightened capital impairment risks for Singapore banks, could be negative for the ratings. While the banks' operations are mostly domestically funded, they face several inherent vulnerabilities, including Singapore's economic volatility owing to its small size and high degree of openness, and the banks' large exposure (close to 50% of loans) to the property market, although a large one-third of loans are in residential mortgages. Singapore's GDP growth and residential home sales have eased in recent months from 2010's levels, and remain at risk should external conditions weaken significantly.

However, Singapore banks have experienced these challenges in the past and Fitch notes their resilience through such troughs, with capital remaining strong even as earnings moderated. This view is also consistent with the conclusion of Fitch's stress test. Capital has been Singapore banks' historical rating strength and continues to underpin their robust loss-absorption capacity, with their core Tier 1 capital adequacy ratio (excluding hybrids and preference shares) ranging from 11.5% to 12.5% at end-June 2011. Fitch expects the banks to stay well-capitalised, noting the strong regulatory environment and the banks' track record in this regard.