Companies deleveraging while households gear up to buy property: MAS review

THE unwinding of pandemic-induced precautionary buffers has made Singapore’s companies, households and banks more financially vulnerable this year, said the Monetary Authority of Singapore (MAS) in its annual Financial Stability Review on Friday (Nov 25).

MAS expects all three sectors to remain resilient in the face of potential global macro-financial shocks next year, but flagged pockets of risks among highly leveraged households and smaller businesses.

In its review, MAS said the Singapore economy will slow to a “below-trend pace” in 2023 amid weakening external demand, high inflation and tighter financing conditions. It also noted emerging vulnerabilities from climate change and cryptocurrency assets.

A severe flooding shock across the Asean-5 economies – Indonesia, Malaysia, the Philippines, Singapore, and Thailand – could mean material losses for banks and insurers. Over the long run, physical and transition risks could also have a significant impact on banks’ and insurers’ balance sheets.

Meanwhile, the ease of access to crypto assets creates greater opportunities for cross-border capital flight and for shocks in the crypto ecosystem to spread through the traditional financial system. Growth in decentralised finance could also increase the proportion of unregulated financial services activity in the economy.

Corporates likely resilient

Among Singapore’s corporates, a recovery in earnings as of the second quarter this year has eased leverage risks and raised debt servicing ability.

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The corporate sector’s debt-to-GDP ratio fell to 149 per cent in Q2 2022 from 156 per cent in Q2 2021.

The banking system’s corporate non-performing loan (NPL) ratio fell to 2.3 per cent in the third quarter of 2022 from 3 per cent in Q3 2021.

But liquidity risks have increased significantly as cash buffers built during the pandemic are drawn down, while maturity risks have risen slightly due to an increase in the proportion of short-term debt usage.

Also, although not an immediate and material concern, there has been a rising trend of default risks in recent months.

The utilities and oil and gas sectors saw the steepest rise in probability of default, amid soaring commodity prices provoked by the war in Ukraine, while construction companies continue to see a rising trend due to supply-side challenges.

Small and medium-sized enterprises (SMEs) remain more vulnerable than large ones, with the accommodation and retail sectors having a higher proportion of vulnerable SMEs.

Bank loans to SMEs have risen 8.7 per cent over the year to Q3 2022, above the overall corporate sector loan growth of 3.3 per cent.

The NPL ratio for SMEs has fallen, although banks recognise that profits – typically leaner for SMEs – may be hit by headwinds from rising rates and persistent inflation.

Household debt manageable for most

The balance sheets of Singapore’s household sector strengthened in the first three quarters of 2022, amid robust employment gains and strong wage growth.

But household financial vulnerabilities rose in Q3 on the back of higher maturity risks, as households took on more short-term debt.

Housing loans were the key driver of rising household debt, although debt grew at a slower pace since property market cooling measures were implemented in December 2021.

Housing NPL ratios also fell to a decade-low level of 0.3 per cent, while financial institutions and borrowers have built significant buffers against falling property valuations.

MAS’ stress test suggested most households should be able to maintain their debt servicing ratios even under conservative scenarios of significant income losses and sharp interest rate hikes, while non-performing mortgage loans are expected to remain low.

But MAS flagged vulnerabilities among households that are more leveraged or have higher expenditures relative to their income.

Meanwhile, private residential property prices have continued to rise despite rising interest rates. This reflects firm underlying demand and strong purchasing power, MAS said.

Property prices rose by an average of 2.7 per cent quarter on quarter in the first three quarters of 2022, above the average gain of 2.6 per cent in 2021, with properties in the outside of central region (OCR) registering the strongest pace of increase.

Transaction volumes were 10 per cent above pre-Covid-19 levels, although they have fallen from recent highs in 2021.

As for rentals, strong leasing demand has caused the overall vacancy rate to fall to 5.7 per cent in Q3, below the 10-year average of 6.8 per cent, with rental prices increasing across all regions.

MAS expects the ramp-up in newly completed private residential units will alleviate some tightness in the rental market.

Banks continue to post strong financials

The banking sector in Singapore has emerged from the pandemic with strong capital and liquidity buffers, although economic uncertainties may weigh on credit risk management, MAS noted.

Credit growth has remained healthy amid growth in non-bank and interbank loans. The sector also had healthy capital buffers and low NPL ratios of 1.8 per cent as of Q3.

But MAS pointed out that tighter financial conditions and higher costs may weaken debt repayment capabilities of borrowers and hit the asset quality of banks. Resident leverage risk rose in 2022 amid a decline in liquidity buffers, although the sector’s liquidity positions remained strong.

MAS expects banks will have sufficient liquidity to intermediate Singapore dollar and foreign currency loans, but noted heightened risks of liquidity imbalances in key international financial markets. The local banks have maintained strong capital and liquidity positions and registered higher net profits, as rising interest rates boosted net interest margins and interest income, MAS added.

The overall asset quality of local banking groups also improved, with the NPL ratio falling to 1.3 per cent in Q3 2022 and remaining below the overall banking system’s NPL ratio.