Stable playing field a gain for Singapore banks: report

High credit costs can be covered by profits.

Singaporean banks still reap the benefits of operating in an economically-stable environment, as shown by their robust funding profiles and the sound financial system, according to an S&P Global Ratings report.

Sector fundamentals will remain healthy despite credit costs possibly doubling or tripling this year, with the increase coming from a low base from a long-run average of 20-25bp of loans, which can be covered by profits and will leave capital intact, analysts Ivan Tan and Rujun Duan said.

Institutional framework remains strong as well, with stringent capital regulations and the regulator having a good track record of maintaining stability during past crises. The sector does not appear to be fazed by any market distortions, S&P added.

However, the country’s dependence on external demand and foreign investment has also left lenders vulnerable to economic shocks brought by the pandemic, as demonstrated by a possible asset quality decay this year. Loan growth is expected to be moderate at 2-3%, but profit generation can adequately cover the modest growth and elevated credit costs.

In order to be competitive in the regional market, Singapore banks are aggressively adopting fintech especially for transactions and payments. The potential entry of digital banks also don’t pose any threat to established domestic lenders, as the Monetary Authority of Singapore (MAS) works to keep a “strong Singaporean core” in the system, the report noted.

Overcapacity does not appear to be on the horizon due to the major banks’ ability to produce satisfactory risk-adjusted returns without taking undue risks, S&P said.