Singapore banks, insurers in ‘good position’ to withstand severe macrofinancial shock: MAS

SINGAPORE’S banks and insurers have sufficient capital and liquidity buffers to withstand potential downside risks arising from severe macrofinancial stresses, said the Monetary Authority of Singapore (MAS) in a report on Wednesday (Nov 27).

In its annual Financial Stability Review, it noted that the overall banking sector has maintained or improved its performance across the indicators for financial vulnerability.

Liquidity and maturity risks remained low, as banks maintained comfortable liquidity positions and healthy loan-to-deposit ratios. Meanwhile, their leverage vulnerabilities fell due to stronger capital ratios, even as loan growth picked up.

MAS noted that overall asset quality also improved over the past year for most sectors.

Some sectors with relatively higher non-performing loan (NPL) ratios in the past – such as the transport and storage, electricity, gas and water, and wholesale trade sectors – saw their NPL ratios fall to multi-year lows, it noted.

The property and land development, construction and manufacturing sectors had marginal increases in NPL ratios, as still-high borrowing costs and higher labour and materials costs hit profitability and cash flows.

For the banking system, total provisioning coverage rose to 119.9 per cent as at Q3 2024, up from 111.1 per cent the year before.

At the local banking groups, provisioning coverage was “healthy” at 252 per cent as at Q3; their capital positions were “well above” regulatory requirements – aggregate Common Equity Tier-1 (CET-1) ratio stood at 16.7 per cent, MAS said.

Meanwhile, the liquidity buffers of domestic systemically important banks are also “well above” minimum regulatory liquidity coverage ratio requirements.

The banking system’s funding structure remains healthy amid stable non-bank deposits. Deposits registered robust growth in the past year, largely driven by higher deposits from individuals.

Loan growth recovery 

Over the past year, credit to non-bank entities rose amid increased loans to resident borrowers and the strengthening in the domestic economy.

Overall credit growth peaked in early 2024 and moderated in Q3, largely driven by interbank lending, MAS said.

Lending to non-resident, non-bank entities was stable over most of 2024, with banks continuing to intermediate funds to Developed Asia and Europe. But lending denominated in US dollars weighed on loan growth, due to higher US interest rates and the stronger dollar.

Loans to Singapore residents accounted for most of the recovery in overall lending to non-bank entities. There was a broad-based increase in lending to domestic-oriented sectors, including property-related and information and communications.

MAS also noted nascent signs of improvement in lending to trade-related sectors, as the manufacturing and wholesale trade sectors grew on a sequential basis in September.

But the total loan value to Singapore’s small and medium-sized enterprises (SMEs) remained weak, due to a natural run-off of loans under Covid-era enhanced loan schemes, and also tighter credit conditions due to the pass-through of the earlier rise in global interest rates.

Nevertheless, overall credit risk premia for SMEs remained below the historical average, MAS said.

MAS said sustained high interest rates, slower global economic growth, escalating trade tensions or geopolitical conflicts could raise credit costs and dampen lending volumes, which put pressure on banks’ profitability and capital positions.

Banks should thus continue to maintain sound underwriting standards, ensure that their loan provisions are adequate, and remain vigilant against potential liquidity risks, it added.

Non-bank financial institutions 

Meanwhile, MAS does not expect Singapore’s non-bank financial institution (NBFI) sector – which includes insurers and funds – to pose a systemic risk to Singapore’s financial system, even as global markets stay vulnerable to shocks.

Assets in the sector grew by 4 per cent over the past year, due to expansions of insurers and investment funds amid resilient global economic growth and gains in global capital markets.

Stress tests found that insurers can continue to meet regulatory capital and liquidity requirements under an adverse scenario of multiple economic and financial shocks, MAS said.

The prevailing still-elevated interest rates generally favour life insurers, given that their insurance liabilities have typically longer durations than their assets. Higher rates also reduce the value of long-term guaranteed liabilities.

But MAS highlighted that higher rates may constrain new business and increase policy redemptions as a result of competition from other higher-returning investments; ongoing geopolitical uncertainties could also have an impact on global financial markets.

Meanwhile, most funds would have sufficient liquid assets to meet redemption needs under a severe redemption shock, MAS found in a liquidity stress-simulation exercise.

A limited number of fixed-income funds would face a liquidity shortfall of between 2 and 16 per cent of their total net assets, but these funds accounted for just 7 per cent of the total net assets among the funds assessed in the exercise, MAS said.

Potential fire sales by investment funds will also unlikely cause significant contagion spillovers to Singapore banks and insurers, given the small degree of portfolio overlap.

Similarly, risks in the over-the-counter (OTC) derivatives market appear to be contained as the majority of such trades tend to be in deep and liquid global markets.

In the Singapore OTC derivatives market, total gross notional stock of derivatives outstanding rose 16 per cent on year to S$74.9 trillion as at September 2024.

Interest rate and foreign exchange OTC derivatives accounted for the bulk of transactions booked and traded in Singapore, constituting 62 per cent and 35 per cent of the total outstanding notional amount, respectively.

As for private credit funds, MAS found that banks and insurers in Singapore have relatively small exposures to private credit and have risk management policies to mitigate risks from these exposures.

Nevertheless, it noted risks to FIs can increase for a variety of reasons, including a higher interest rate environment, which would make it challenging for the borrowing firms to service their debts.

Vulnerabilities in private credit may also grow as increasing competition and pressure to deploy capital could lead to lower underwriting standards and weaker covenants.