Singapore banks may be vulnerable to external shocks amid looming recession

But, there remain various reasons to assure investors that Singapore banks are likely safe in the event of a global economic slowdown.

The assurance came from Standard & Poor’s analyst Ivan Tan in response to queries from Singapore Business Review about the risks facing local banks.

According to Mr. Tan, Singapore may not likely to escape the ill effects of a looming global recession which is emanating from US economic slowdown and Eurozone debt crisis but Singapore banks are expected to prove resiliency.

 “Singapore is an export dependent country and we can expect a global slowdown to negatively impact demand and business. Singapore banks do not have material direct exposures to the US and Eurozone but the impact to Singapore banks will be indirect, in terms of negative business sentiments and reduced demand which affect its export dependent customers, especially if the global economic slowdown is prolonged,” he said.

“We expect the banking system however to continue to display resilience to such external shocks and reacting appropriately including taking defensive strategies to preserve its capital,” he said.

Looking back, the expert noted that Singapore banking system has proven itself to be resilient to indirect external shocks, as seen in the financial dislocation of 2008 and 2009, supported by their generally healthy financial profiles and sensible risk management.

Moreover, the Singapore government also cushioned part of the external shocks through its stimulus plan in 2009 which helped preserve jobs and viable companies stay afloat.

Moving forward, Standard & Poor’s according to Mr. Tan expect loans growth to moderate from levels seen in 2010, especially in property related lending as the government cooling measures begin to take effect.

“Global economic uncertainty is likely to limit corporate lending growth. We also expect interest margins to remain lean due to competition and the generally low interest rate environment,” he said.

“In response, we expect banks to diversify from their traditional lending business to focus on fee income generation. Overall profitability will remain adequate, with some possible upside as and when interest rates increase, provided credit costs are kept under control,” Mr. Tan added.

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