Escalating trade wars may weigh on Singapore bank earnings

OCBC and DBS are more vulnerable due to their larger Greater China footprint.

Rising global tensions and a stronger US dollar pose asset quality and profitability challenges for Singapore’s banks, particularly for those based in greater China, according to a report by Fitch Ratings.

Also read: Here's how the potential US$200b trade war tariffs put heat on Singapore's banks

Further local rate increases are likely based on the direction of the US Fed funds rate which will increase pressure on banks’ asset quality, especially their small and medium enterprise (SME) books, the report noted. However, the impact is unlikely to be broad-based given Singapore’s history of robust underwriting standards and macro-prudential measures in the past years.

“We believe Singaporean authorities will maintain their proactive approach to macro-prudential regulation by introducing further measures in the event of resurgence in real-estate sentiment,” Fitch analysts said in the report. “That said, recently introduced measures have instilled greater discipline amongst property developers in their pursuit of more development-land parcels.”

Whilst the growth and earnings of Singaporean banks in greater China is projected to face stronger headwinds, the direct impact on banks’ asset quality may be modest at most, according to the analysts.

“Challenges also stem the effects from slowing China growth on Singapore, and other economies in the region where the banks are also exposed,” Fitch’s analysts added.

After factoring in the rising headwinds to Asia’s economy, Fitch revised its sector outlook to negative from stable. However, the firm said it believes that there is still sufficient headroom for its ratings to withstand the potential economic challenges given the strong credit profiles of Singapore’s banks.