Fitch affirms 'AA-' score on Singapore banks, holds negative earnings outlook

FITCH Ratings has affirmed its "AA-" ratings on Singapore banks and removed the trio from rating watch negative (RWN), given that the materialisation of stressed conditions have become "less immediate".

This comes as the banks' operating environment and financial metrics are, for now, consistent with the credit rating agency's base-case expectations, it said in a statement on Monday. The banks were previously placed on RWN to reflect the weak operating environment.

"There remain downside risks to business conditions and the banks' financial profiles domestically and overseas, but the materialisation of stressed conditions has become less immediate," said Fitch Ratings.

But the agency cautioned that these risks could continue to pressure the banks' ratings headroom over the next 12-18 months, and are reflected in the agency's negative outlook on long-term issuer default ratings.

Among the banks' key overseas markets, a tentative economic recovery looks to be underway in Greater China, but efforts to contain the pandemic continue to pose significant challenges in parts of South and South-east Asia.

As the operating environment is a key rating driver for the banks' ratings - and the outlook remains negative - risks of ratings downgrade could rise should the operating environment or financial profiles deteriorate beyond base-case expectations, said Fitch Ratings.

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It has projected for banks' common equity Tier 1 (CET1) ratios to dip over 2020-2021 as earnings decline and risk-weighted assets increase from credit deterioration, leaving limited headroom.

It also holds a negative outlook on the banks' capitalisation and leverage scores, which are likely to be lowered should their CET1 ratios fall below 14 per cent without "credible plans" to rebuild them quickly.

As at the second quarter, DBS' CET1 ratio stood at 13.7 per cent; OCBC at 14.2 per cent and UOB at 14 per cent.

While the banks' proportion of loans under relief as at H1 2020 was not "excessive" - ranging from 5-16 per cent of total loans - Fitch Ratings is expecting impaired loan ratios to more than double by the end of 2021, from end-2019's level of 1.5 per cent, as soured loans surface after relief measures lapse.

"The outlook on asset quality remains negative due to risks of a slower-than-expected economic recovery in 2021 that would continue to challenge borrowers' repayment capacity," the agency said.

Profitability is also projected to remain weak in the next 12 months from low global interest rates, subdued credit growth and high provisions.

Aggregate provisions of the three banks increased fivefold year-on-year in H1 2020 due to general provisioning in anticipation of expected delinquencies till end-2021.

A modest recovery in fee income in H2 2020 and unrealised investment gains could mitigate revenue pressures from narrower interest margins, said the agency, though earnings outlook remains negative.

That said, the funding and liquidity profiles remain a rating strength of the Singapore banks. "(These) profiles remained solid in H1 2020, with stable loan-to-customer deposit ratios and significantly improved low-cost deposit ratios," said the agency.

It noted that the 6 per cent increase in aggregate deposits year-to-date is evident that the banks are beneficiaries of depositors' flight to quality in times of uncertainty.