How rising credit cost could hurt Singapore banks' profitability

Asset quality may start to crack.

According to Maybank Kim Eng, Singapore banks have enjoyed a benign credit environment for a long time thanks to persistently low interest rates.

However, with short-term interest rates expected to rise after recent years of rapid loan growth, there are concerns that Singapore banks’ asset quality may start to crack.

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The low specific charge-off rate for our universe, which is measured as specific allowances as a percentage of average net loans, has helped cushion the earnings drag arising from continually depressed industry net interest margin (NIM).

With the best of credit charge-off rate likely behind us, there are fears that an uptick could be a drag on banks’ profitability. Based on our estimates, every 5bps increase in credit cost will hurt banks’ earnings by up to 3.1%, with a slight variation from bank to bank