Weak operating environment spells trouble for Singapore banks

More than half of the big three’s loans are exposed to at-risk overseas markets.

The deteriorating operating environment in which Singapore banks operate puts further pressure on the lenders, who are already operating on a limited headroom, reports Fitch Solutions.

Fitch has placed DBS, OCBC, and UOB on rating negative watch as the pandemic crisis continues to wreak havoc on the constrained environment and, in turn, on key financial metrics.

In particular, banks’ operating environment (OE) score as assessed by Fitch may be lowered if there is a worse-than-expected slowdown or slower-than-expected recovery in the key markets the lenders operate in.

Less than half of the big three banks’ loans are in Singapore. Whilst the overseas markets where the banks operate have been stable in recent years and have even been significant contributors in the banks’ growth prospects, foreign markets are also currently under stress and are of higher risk compared to the island.

In particular, the OE scores of Malaysia, Thailand, and Indonesia—where the big three have a presence in—were downgraded in 2020 mainly driven by the downward revision in their GDP forecasts.

Singapore’s own operating environment faces a negative outlook as a result of the pandemic’s impact.

“In addition to the OE, we placed the Singapore banks' asset quality, earnings and profitability, and capitalisation and leverage scores on negative outlooks in April 2020 due to the pandemic, Fitch concluded in a note.