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Singapore banks' strong capital position will help them absorb increasing risks: S&P
THE three Singapore banks' strong capital position will help them absorb more loans souring which may happen when interest rates rise from current low levels, said Standard & Poor's (S&P) analyst Ivan Tan.
"Their capitalisation is quite high," said Mr Tan on Tuesday, adding that their Tier 1 capital ratios average 12-13 per cent, well above the regulatory 8 per cent minimum.
The three local banks - DBS Group Holdings, OCBC Bank and United Overseas Bank - are rated AA- by S&P, a rating which is higher than other banks in the region.
Mr Tan was elaborating on a just-released S&P report that said Asean banks' asset quality could weaken over the next 12 to 18 months.
It said Asean banks' strong performance over the past few years should enable them to absorb the impact.
"The healthy recurring profits and adequate capital cushions of Asean banks and the strong government support for these banks will underpin rating stability and buffer against downside risks."
As for the Singapore banks, their non-performing loan ratio of about one per cent is by historic standards and also globally extremely low, he said.
Their liquidity position is also very good, and retail deposits-to-loans ratio is quite high, which means their cost of funds is quite low, he said.
"Their reliance on wholesale/institutional funding is minimal," said Mr Tan.
The risk going forward is interest rates rising from current low levels.
"The only way to go is up," said Mr Tan.
Property prices have risen some 60 per cent in the last five years while income growth has not kept up, so the affordability level has deteriorated, he said.
"Some credit weakening is inevitable in Singapore and Malaysia, given the countries' high household debt, as interest rates there start to increase," said Mr Tan. "However, a series of measures to cool the property market by the governments in both nations should limit the impact."
Home loans make up about 25 per cent of Singapore system loans, he said.
When interest rates rise, with most home loans on floating rates, it will push the monthly repayments higher.
"It could increase the rate of delinquencies," he said.
The key three-month Sibor (Singapore interbank offered rate) has risen to 0.9 per cent from 0.4 per cent at the beginning of 2015.
Still the Singapore banks' strength has been tested, he said.
The Monetary Authority of Singapore asked banks to do stress tests on a 200 basis-point increase in interest rates by the end of this year and they came out fine, he noted.
He estimates that the three-month Sibor could end the year higher at 1.20-1.25 per cent. "Under that scenario banks will have sufficient buffer for delinquencies," he said.