Singapore banks emerge fully resilient under stress test

Singapore banks can withstand asset-quality shocks through their earnings alone, a stress test conducted by Fitch Ratings revealed.

The test yielded that in a recessionary environment, Singapore banks' non-performing loan ratios could peak over a two-year period to 10%-11% by end-2013 from an average 1.2% at end-2011.

The banks' pre-provision profit is enough to cover "stressed" credit costs, which togetherwith those of non-loan assets would rise to 2.3%-2.5% of loans annually.

Singapore banks would remain well capitalised. Unlike other developed countries during the 2008-2009 global downturn, extraordinary state support is unnecessary.

Here's more from the report from Fitch Ratings:

Fitch Ratings says its stress test shows that Singapore banks are able to keep their risk profiles intact during economic troughs. Fitch says Singapore banks can fully absorb asset-quality shocks through their earnings alone, thereby leaving a limited impairment risk on capital. Such resilience was broadly demonstrated through previous business cycles, and the Rating Outlook is hence Stable.

Fitch has used reasonably harsh assumptions in its stress test exercise, with the aftermath of the 1997-1998 Asian financial crisis being the main reference point but with also suitable adjustments. In a recessionary environment, Singapore banks' non-performing loan ratios are assumed to peak over a two-year period to 10%-11% by end-2013 from an average 1.2% at end-2011. The banks' pre-provision profit - which Fitch has also stressed downwards - is enough to cover "stressed" credit costs, which together with those of non-loan assets would hypothetically rise to 2.3%-2.5% of loans annually.

With earnings fully covering credit costs, Singapore banks should remain well capitalised. This stress test also corroborates Fitch's view that the need for extraordinary state support for the banks - as seen in some other developed countries during the 2008-2009 global downturn - is remote. This supports the banks' 'aa-' Viability Ratings, which are amongst the highest of banks globally. Their core Tier 1 capital adequacy ratio is likely to stay around current levels, which ranged from 11%-12% at end-March 2012.

The aforementioned findings do not represent Fitch's forecast for Singapore banks, as this stress test is a broad-based exercise and gives little benefit to the banks' satisfactory risk management, actual recovery potential on NPLs and other possible mitigating measures in a difficult environment. In reality, the agency expects Singapore banks to remain profitable in 2012, with impairment charges likely to rise to only 70bp, which are well below the levels under "stressed" conditions.