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Singapore banks' South, S-E Asia exposure raises risks: Fitch Ratings

WHEN it comes to risks from markets outside Singapore, the Republic's three major banks DBS, UOB and OCBC experienced more asset-quality issues in South and South-east Asia. This is compared with other regions like China or the rest of the world, a new Fitch Ratings report has found.  

The global credit rating agency on Monday added that this is "not surprising" as these regions felt more volatility than other regions in the past decade.

This included a fallout in the oil and gas sector which saw banks' loan quality taking a step back in 2015 to 2017. Examples include DBS being affected by its India middle market portfolio which declined in 2013 to 2014, and UOB classifying some of its shipping accounts as impaired loans.

Although Singapore banks have since introduced enhancements to their credit assessment and monitoring following these incidences, Fitch Ratings said it "remains to be seen" how this would minimise credit quality slippage in certain events.

These events include economic deterioration in key jurisdictions or another commodities sector downturn such as in coal, crude palm oil or oil and gas.

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That being said, the credit ratings agency believes Singapore banks will focus on organic growth in the region, although it does not rule out the possibility of an acquisition should the opportunity arise.

"We believe acquisitions are likely to be moderate rather than franchise-transforming undertakings. We expect the banks to remain disciplined and maintain sound financial buffers," the report added.

When it comes to the China market, the report said the banks' loan quality in this region has been "generally sound" with impaired loan ratio ranging from 0.2 per cent to 1.4 per cent in the last decade.

"Fitch believes the underlying loan quality has yet to be fully tested in a broad downturn, while the exposure has increased in size," the ratings agency added.

Singapore banks' China risk appetite lies mainly in targeting top-tier and "systemically important" state-owned enterprises, as well as large local and foreign corporations – which include large and well-capitalised Singapore corporations operating in China.

A large chunk of the banks' exposure in China is short-term trade loans, which generally bear low risk, the report said.

As for the rest of the world, the underlying exposure of Singapore banks has "likely changed" since the large corporate defaults seen from 2009 to 2012. This saw DBS being hit by Dubai-linked entities in 2009, and UOB impacted by a large transportation-related account in Australia.

The change has likely come from banks focusing on financing investment flows to and from developed markets, through global investment and property funds, along with multinational corporations. These loans are also denominated mainly in US dollars.

Fitch Ratings said the credit strength of these loans are likely to be "robust and most likely to be tested in the event of economic stress".

This was after growing at a rapid 15 per cent compound annual growth rate (CAGR) over 2014 to the first half of 2019 – although off a small base compared with the banks' South-east Asia and China exposures.

Credit risk is further allayed by hard asset collateralisation, however, valuations of these assets could be dented in a sharp property market downturn, Fitch added.

Fitch Ratings said it regards the overseas operating environments of the three major local banks to be of higher risk than that of Singapore. Thus, a downward adjustment of its operating environment assessment of DBS, UOB and OCBC may be triggered by a "meaningful and sustained increase in exposure" to these volatile markets.

"This would increase the likelihood of negative rating action, unless mitigated by stronger loss-absorption buffers," Fitch Ratings said, adding that positive rating action is "improbable", as the ratings are already "among the highest" of banks rated by Fitch globally.

Fitch Ratings had revised its outlook on the operating environment (OE) of the three major banks to "negative" from "stable" on May 7. The midpoint - kept unchanged - was consistent with the implied 'aa' category OE score, and was supported by Singapore’s high GDP (gross domestic product) per capita and 2018 99.5 percentile ranking in the World Bank’s Ease of Doing Business index. (see amendment note)

However, the implied score does not take into account the banks' rising exposure in the region.

"We would therefore assess the score at 'aa-'/Stable for banks whose operations are concentrated mainly in Singapore. Standard Chartered Bank (Singapore) at 'A/Stable/a' is one case in point," it added. 

The revision to the OE outlook captured the banks' increasing exposure to lower-rated jurisdictions in the faster-growing, but higher-risk emerging markets of China, and South and South-east Asia. 

Amendment note: A previous version of this article incorrectly stated Fitch's revision of its outlook on the operating environment of the three major banks. The article has been amended to reflect this change. 

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