Are local banks safe from the China slowdown?

Non-performing Chinese assets will rise.

Singapore banks are protected from China’s slowdown because of their selective lending to mainland corporates, according to a report by Fitch.

Fitch believes that the three largest banks’ credit profiles will remain sound despite a more challenging operating environment, as they are supported by strong loss-absorption cushions in the form of healthy pre-provision profitability and capital adequacy, together with policy buffers introduced by proactive and prudent regulators.

“Banks’ selective lending in China – focusing on SOEs, large corporates and short-term trade loans – is another protection,” Fitch said.
However, Fitch warns that the average non-performing asset (NPA) ratio of the three Singapore banks will rise modestly to 1.1% by end-2015 and 1.2% by end-2016.

“A key risk lies in banks’ exposure to the commodity sector, which has been hit by low commodity prices. We expect modest risk from this sector, given Singapore banks’ diversified loan portfolios and steady asset-quality track record,” said the report.