Local banks gear up for testing times as credit outlook dims

The big three are fattening up their buffers.

Singapore’s three biggest banks are building up their buffers in preparation for rising credit costs and a mild deterioration in credit quality.

Analysts warn that credit costs will trend up for Singaporean banks this year while asset quality is feared to deteriorate as cyclical risks intensify.

According to Fitch Ratings, these risks include the ongoing domestic property market correction, slowing economic growth both in Singapore and overseas, and the possibility of sustained lower commodity prices.

“Credit costs for Singaporean banks are likely to continue rising from the current cyclical lows, owing to the aforementioned risks and loan-book seasoning after a period of rapid growth in recent years,” stated Fitch.

Meanwhile, other analysts note that banks are beginning to build up their buffers in anticipation of more non-performing loans (NPLs).

“The higher general provisions made by the banks in 4Q and heightened appearances of chunky one-off NPLs are telling signs of worsening credit quality in FY15. We expect credit costs to trend up to normalised levels in FY15 and NPL ratios to rise from the current 0.6-1.2%,” stated CIMB.

However, banks can rely on their strong capital buffers and profitability to help them sail unscathed through these testing times.

“Fitch expects the impact to be manageable, considering the banks' strong capital buffers, adequate profitability, reasonable loan-loss reserves and proven management track records. The average NPL ratio for the three domestic Singaporean banks remains low at under 1%,” stated Fitch.

This sentiment is supported by Maybank Kim Eng, who noted that it is still early days for credit quality to deteriorate, as stresses in the oil & commodity sectors will take time to emerge.

“There are no signs of stress yet. As the credit outlook dims, banks have set up more buffers against lumpy provisions,” noted Maybank Kim Eng.