Singapore gross domestic product forecast at 5.1%

While Hong Kong, Indonesia, Malaysia and Thailand is expected to register a healthy GDP growth, ranging from 4%-6%.

Fitch Ratings has today said in a new comment that Singapore's three local banks' credit profiles will be supported by the domestic economy which is likely to expand further into 2011. The Outlook on all banks' 'AA-' Long-Term IDRs is Stable, despite the somewhat uncertain global economic environment and possible challenges from a modest fall in Singapore's housing prices. Indeed, operating conditions in H208-H109 were fairly challenging amid the recent global downturn, though Fitch notes that the local banks' performance was resilient, and their capital positions remained intact and strong.

Barring any adverse global events, Fitch's 2011 growth forecast for Singapore's GDP is 5.1%, which is satisfactory for a "nearly developed" economy. With Hong Kong, Indonesia, Malaysia and Thailand (where Singapore banks have a presence) also expected to register healthy GDP growth, ranging from 4%-6%, the agency expects the local banks to continue delivering healthy profits in 2011. However, ROA may ease slightly due to lower treasury gains and narrower net interest margins.

Private house prices in Singapore are now at record highs. In a modest property price correction scenario, Fitch does not expect this to significantly affect the quality of Singapore banks' property-related loans: mortgages represent 25%-30% of their lending portfolio and construction loans a further 15%. Evidently, when the official property price index fell by 25% between June 2008-June 2009, the delinquency rate for mortgages peaked at 1.0%, thanks to well-contained job losses and low interest rates, while construction loans was 1.3% due to the generally sound balance sheets of property developers. From September 2009, the local authorities have implemented property-related measures, which include the lower regulatory limit on home loans' loan-to-value ratio (which helps to further enhance the quality of mortgages).

Being a fairly open economy, Singapore is greatly influenced by the vagaries of the external environment, although the government has the capacity to implement countercyclical measures to alleviate the impact of negative global developments. Fitch also believes that Singapore banks have strong loss absorption capacities to cope with asset quality deterioration (in a renewed downturn scenario), owing to their good earnings cushion and high capital buffers. Their strong and high-quality capitalisation has been a rating strength, with a core Tier 1 capital adequacy ratio (excluding hybrids and preference shares) of over 11% at end-September 2010.

Importantly, Fitch assesses capital impairment risks as remaining low for the local banks, as concluded in the agency's stress tests. Indeed, higher credit costs in 2009 amid difficult operating conditions were easily covered by earnings alone. With the banks' good earnings profiles and managements' generally prudent track records, the agency believes Singapore banks will remain well-capitalised. Also, it does not expect Basel III to be a big challenge for the banks.

The local banks have good funding and liquidity profiles, thanks to their strong domestic deposit franchises. Their loans/deposits ratios remain healthy, averaging 83% at end-September 2010, as there is ample liquidity in the banking sector.