Are Singapore banks stable enough for a devastating economic scenario?

It seems so, if the Southeast Asian banks' closing credit gap with Western peers is anything to go by.

According to a release, Moody's Investors Service hosted its annual 'Asian Banking & Sovereign Conference' in Singapore, analyzing the relative improvement in the underlying credit fundamentals and ratings of Southeast Asian banks, especially when compared with their global peers.

"The ratings gap that had long separated banks in Asia from their Western peers has now essentially been closed because the stable credit quality of Asian banks throughout the global financial crisis has resulted in a comparative improvement in their ratings," said Jean-Francois Tremblay, Singapore-based Associate Managing Director, Moody's Investors Service.

"In contrast to Western banks that have experienced significant credit quality challenges since the outset of the global financial crisis, Asian banks are only moderately leveraged, largely deposit funded and generally conservative in their lending" he added.

The analysis presented during the conference highlighted that Southeast Asian banks are taking advantage of the opportunities created by the retreat from Asia, of European and other foreign banks, which Moody's credit analysts see as a double edge sword in some banking systems.

"Rapid growth in both size and geographic scope has contributed to improve asset quality and profitability metrics, but it has also made Southeast Asia's banks take on sizeable new risks.

"Given the evolving credit profile of Asian banks, it is important to continuously update stress tests to reflect these changes and assess their resilience in an economic downturn. The biggest risk to the banks is the contagion from the euro area through trade channels" Tremblay added.

However, as indicated by Moody's stable outlooks on most South East Asian banking systems, the analysis conducted by the rating agency concludes that the majority of banks have built sufficient buffers to sustain a worse-than-expected economic scenario.

Nevertheless, our central scenario is that despite the challenging external economic environment currently, banks will continue to grow, albeit at a slower pace.

Tom Byrne, Senior Vice President and regional head of Moody's Sovereign Risk Group, said that although Moody's economic growth assumptions have been revised downward recently for many economies of the Asia Pacific
region, growth is still expected to remain robust in absolute terms.

"And unlike governments in Europe whose credit profiles have deteriorated, the capacity of Asian governments to stimulate the economy or provide support to banks in times of stress has remained intact or has even improved in some cases," said Byrne.

Moody's currently carries a stable outlook on most large South East Asian banking systems, namely Singapore, Indonesia, Malaysia, Thailand, the Philippines and Sri Lanka, whereas it has a negative outlook on Vietnam and India.