Can Singapore’s biggest banks survive as operational headwinds mount?

There’s rising pressure on asset quality, profitability.

Singapore’s top three banks—namely, OCBC, DBS, and UOB—are poised to surmount the mounting headwinds in operating conditions leading to rising pressure on asset quality and profitability.

According to a report by Moody’s, credit growth in Singapore is expected to keep decelerating against the background of weak economic growth and banks’ tighter underwriting.

Additionally, macroeconomic conditions have also weakened in the key overseas markets in which Singapore banks operate—particularly in China, Hong Kong, and Malaysia—leading to more pressure on their overseas loan books.

But while the bleary outlooks on the three banks are driven by broad macroeconomic weaknesses, these banks’ individual exposures to specific challenges and risk factors vary.

For instance, while all three banks saw their asset quality metrics crumble in 2015m OCBC’s asset performance was the strongest. Meanwhile, UOB underperformed in terms of asset quality due to its greater focus on Singapore’s small- and medium-sized enterprise segment. DBS stands out, though, due to its larger exposures to the currently vulnerable oil and gas services businesses, compared to the other two banks.

Despite these risks, all three banks have continued to post very strong loss-absorption buffers in terms of capital, loan loss reserves, and pre-provision income, as well as strong funding and liquidity profiles.

“Specifically, Moody's scenario analysts suggests that the banks can withstand a 250 basis point increase in their NPL ratios and a 25% decline in pre-provision income over two years and still remain profitable, with OCBC slightly ahead of DBS and UOB,” the report notes.

Further, OCBC, DBS, and UOB’s capital ratios are in line with global highly-rated peers in Hong Kong, Australia, and Canada, while their leverage ratios remain largely superior.