Fitch bearish on Singapore banks amidst worsening asset quality

Total exposure to O&G sector stood at $16.1bn or 17% of core capital.

Fitch has revised its sector outlook for Singapore banks to negative, in view of soft macroeconomic conditions that it expects to persist in 2017.

This, it said, could place broadening pressure on asset quality and dampen earnings over the next year.

The ratings agency notes however that Singapore banks’ solid credit profiles – characterised by steady funding and liquidity positions, strong loss-absorption buffers and healthy profitability – support its stable outlooks for their ratings.

Here's more from Fitch:

Credit-Quality Pressures Remain: Key stress lies in the oil & gas sector which we expect will continue to exert moderate pressure on banks’ asset quality in 2017. Prolonged economic weakness could lead to broader asset-quality risks which may also affect small- and mediumsized businesses.

However, we believe the downside risks to be manageable. Banks’ combined exposure of SGD16.1bn to the troubled offshore support services represented 17% of their core equity Tier 1 (CET1) capital at end-September 2016.

Banks’ targeted lending in China – focusing on top-tier state-owned enterprises (SOEs), large corporates, foreign investment enterprises and short-term trade loans – suggests risk from China would be well-contained on the whole. On the housing loan front, we believe proactive macro-prudential measures and strong household balance sheets should contain the risk of a sharp deterioration in loan quality.

Softer Profitability: We expect banks’ profitability to weaken slightly in 2017, driven by higher credit costs and a subdued domestic lending environment. This is balanced, however, by their diversified revenue, with core non-interest income forming close to 40% of operating income –
of which more than half represented recurring fee income over 2012-2015. Banks should enjoy some NIM uplift from higher short-term rates which tend to track the US Fed funds rate.

Solid Capitalisation: Singapore banks’ capital standing remains solid, with fully loaded CET1 ratios ranging between 12.4%-13.5% at end-September 2016. We expect capitalisation to remain stable despite modestly higher risk-weight charges that will affect the banks from 1 January 2017, aided by healthy internal capital generation. Our internal stress tests show that sound capital buffers should enable Singapore banks to weather a significant deterioration in credit quality.

Disciplined Funding: We expect Singapore banks to retain their domestic deposit franchise strengths. Their sound Singapore dollar LCR stood in excess of 200% for 3Q16, and their Singapore dollar loan-deposit ratios had improved to 86.0% by end-September (June: 88.7%, March: 87.2%). The banks’ all-currency LCR averaged a comfortable 132% for 3Q16.