Why Fitch is confident that Singaporean banks will survive headwinds

But sluggish loan growth is predicted.

According to Fitch, Singaporean banks should remain resilient in the face of a more challenging operating environment this year, following solid results in 2013.

A moderation in performance is likely to be induced by recent property-cooling measures and greater volatility in regional emerging markets, resulting in slower loan growth and rising credit costs.

Here's more from Fitch:

The three main banks should be able to maintain their intrinsic financial strength and sustain their solid loss-absorption capability. Core capital is around 11% of risk-weighted assets - among the highest of highly rated banks, globally - and capital buffers should remain sufficient.

The authorities' macro-prudential measures to cool the housing market have been effective in slowing mortgage lending, which has been a key driver of domestic credit activity alongside loans to SMEs and corporates. Moreover, the continuing economic slowdown and financial volatility in several significant emerging markets - such as China, Indonesia and India - could also weigh on loan growth and asset quality. In light of these conditions, ongoing rapid loan growth would be viewed as a negative trend.

We expect the NPL ratio to rise from its low of around 1.0% at end-2013, as we view the current levels as a cyclical low. Slower economic growth and a seasoning of the rapid loan portfolio expansion of the last two to three years should also place greater pressure on retail and SME loans. However, any deterioration is likely to be manageable, as our stress tests indicate that the banking sector has the capacity to withstand a significant increase in credit costs.

Regional expansion strategies are set to continue. This was exemplified as recently as last month, by OCBC's potential takeover bid for Hong-Kong based Wing Hang Bank. But Singaporean banks have also been disciplined in their diversification strategies, and have walked away from transactions when there have been constraints to gaining control - as evident from the failed DBS/Danamon deal earlier in 2013.

We maintain stable outlooks on the three main banks - and across the sector - despite the greater challenges that we see in the operating environment. There is limited upside to Singapore bank ratings as they are already very highly rated, but we also do not see significant downside risk in the near term. The credit profiles should be able to withstand near-term pressures barring any specific, event-driven risks such as overly-aggressive acquisition activity or a sharp deterioration in the macroeconomic environment.