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S&P affirms 'AA-' credit ratings for 3 Singapore banks
S&P Global Ratings has affirmed the coveted "AA-" credit rating of the three Singapore banks on the basis of their sound fundamentals.
The credit rating agency, announcing its first rating of Singapore banks for the year, said on Wednesday that the sound financial profiles of the three should offer them a buffer against further pressures on their asset quality, particularly from upstream oil and gas exposures.
S&P said that it expects DBS Bank, OCBC and United Overseas Bank to maintain adequate capitalisation, sound liquidity profiles and provisioning buffers, which the institutions have built up over many years.
"We are affirming the 'AA-' long-term and 'A-1+' short-term issuer credit ratings on the three banks. We are also affirming the 'axAAA/axA-1+' Asean regional scale ratings on them."
The three banks are the only financial institutions in Asean to have the coveted "AA-" rating.
The outlooks on the issuer credit ratings are stable, said S&P.
"We affirmed the ratings because we believe Singapore banks are coming from a position of strength and have sufficient buffers against downside risks."
The net profits of Singapore banks have lost some momentum due to weakening asset quality and higher provisioning costs, it noted.
The ratio of non-performing loan (NPL) of these banks rose from 1.1 per cent in 2015 to 1.4 per cent last year.
The ratings agency said: "The bulk of new NPLs originated from the vulnerable offshore oil and gas O&G support-services sector.
"We believe that O&G-related NPLs are not yet over.
"Although the rally in oil prices to US$50 per barrel - from the January 2016 low of US$28 - is positive, it is unlikely to resurrect the offshore O&G services industry."
S&P said the slide in oil prices had deterred upstream activity by oil majors and dented the profitability of upstream services providers.
"This is compounded by overcapacity as these companies had made investments for future growth before 2014, until oil prices took a steep dive. We also expect credit costs to remain elevated to cover potential O&G collateral shortfalls from constrained valuations.
"In our opinion, downside risks from upstream O&G services-sector exposures, at about 2 per cent of total system loans, are manageable."
Singapore banks have identified most of the vulnerable exposures, and are working to rehabilitate or restructure the loans, it said.
Loan exposures outside of offshore O&G support industry have continued to perform well, and will likely continue to do so in 2017, it said.
"We forecast Singapore banks' loan growth to remain subdued in 2017 at mid-single digit, broadly in line with bank guidance. We expect the banks' interest margins to improve moderately with a time lag, given a higher probability of more rate hikes in the US.
"We estimate that every 25 basis points (bps) hike in US rates could translate to a 3 bps-5 bps uplift in net interest margins (NIMs) for Singapore banks. Sluggish loan growth and higher credit costs, offset by higher NIMs, will characterise Singapore banks' earnings in 2017. This will culminate in modest to flattish profit growth."
The three banks have been outperformers on the local bourse; their stocks have risen by between 15 per cent and 21 per cent so far this year.
The benchmark Straits Times Index is up 12 per cent in the year to date.