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Singapore banks are well capitalised, says Fitch

SINGAPORE — The Republic’s banking system remains resilient as lenders here are well capitalised, while a robust regulatory framework and macro-prudential measures have helped minimise risks for the sector, said Fitch Ratings in a report.

SINGAPORE — The Republic’s banking system remains resilient as lenders here are well capitalised, while a robust regulatory framework and macro-prudential measures have helped minimise risks for the sector, said Fitch Ratings in a report.

However, Singapore’s banks need to be mindful of the risks involved in expanding overseas, as regulatory, market and legal infrastructure in emerging countries may not be as sound or mature as that in Singapore, it said.

The common equity Tier 1 capital adequacy ratio (CET1 CAR) — a measure of a bank’s financial strength — of Singapore’s banks ranged between 11 and 12.5 per cent as of June, Fitch Ratings’ estimates showed.

“This is high by international comparison,” said Fitch Ratings, adding that it expects the three local banks’ CET1 CARs to remain above the 9 per cent threshold required by the Monetary Authority of Singapore (MAS) by January 2019.

The authority’s requirement is 2 percentage points higher than the Basel III global capital standards.

Fitch’s report yesterday followed its announcement on Wednesday that it had affirmed its ratings for DBS, OCBC and UOB at AA- with a “stable outlook”.

Analysts have recently raised concerns that OCBC’s S$6.2 billion acquisition of Wing Hang Bank in Hong Kong would overstretch its finances, but a S$3.3 billion rights issue announced earlier this month by the lender has since been viewed as a positive move.

The three local banks have been known for their strong capital profile due to “proactive” oversight by the MAS, which has consistently implemented capital requirements above the Basel committee’s minimum. The committee is a global effort to tighten banking supervision and regulations.

The macroprudential policies introduced by the MAS and other agencies have also helped banks manage their exposure to domestic housing loans, which have been growing at a pace of 16 per cent annually between 2008 and last year in a low interest rate environment.

As interest rate normalises, non-performing mortgage loans may grow and affect banks’ credit quality.

Against this backdrop, mortgages accounted for 75 per cent of total consumer loans as of end-June, but loan growth stabilised over 2013 and early this year, said Fitch Ratings, as measures such as the new Total Debt Servicing Ratio and Additional Buyers’Stamp Duty deflated a potential property bubble in Singapore.

Meanwhile, “a disciplined approach to regional growth is imperative in preserving credit profiles, considering the more challenging operating environments in many emerging markets”, Fitch Ratings cautioned.

Singapore banks have been actively expanding their footprint across Asia, with DBS and OCBC focusing on Greater China and its exponential growth.

As loans to China continue to climb, local banks may be increasingly vulnerable to credit quality issues in the country.

“The non-performing loan ratio for local banks’ aggregate Greater China ex-Hong Kong portfolio rose materially higher during the 2008 to 2009 recession,” said the report.

“Therefore, careful risk selection and robust operational controls will remain crucial in managing the potential volatility from a growing China portfolio.”

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