Singapore banks' weak operating environment weighing on ratings: Fitch
SINGAPORE banks' core capital ratios should be sustained at around 14 per cent over the next few years, or they risk triggering a rating downgrade, warned Fitch Ratings.
This comes as deteriorating asset quality and profitability is likely to put downward pressure on capital ratios at a time when there is "limited rating headroom", the credit ratings agency said in a report on Sunday.
The banking trio is rated AA- and placed on rating watch negative by Fitch to reflect the weakening operating environment.
All three banks have targeted for common equity Tier 1 (CET1) ratios between 12.5 per cent and 13.5 per cent. As at the second quarter this year, DBS's CET1 ratio stood at 13.7 per cent; OCBC at 14.2 per cent and UOB at 14 per cent.
Fitch said such targets will be "inconsistent with current scoring" if there is no credible plan to restore them "within a reasonable horizon".
"The capital score is likely to be lowered should the banks sustain CET1 ratios well below 14 per cent without a credible plan to rebuild them to around 14 per cent within the next couple of years."
The agency noted that while Covid-19's impact on profitability will hurt financial profiles through thinner margins, higher credit costs and slower credit growth - which have been factored into the ratings assessment - capitalisation will have a larger impact on the ratings as it is one of the three factor scores rated aa-, which is the same as the viability rating (VR).
The Singapore regulator's call for local banks to cap total dividends per share for FY2020 will "go some way" to helping banks maintain capital ratios at a level "commensurate with risk" for the year, said Fitch, noting that this has saved the banks up to 40 basis points (bps) of capital each.
Overall, the agency has a negative outlook on the banks' earnings and profitability scores, which implies a downside risk to profitability mainly due to impairments that are "larger than currently expected".
Fitch is expecting the lenders' earnings this year to fall by about a third from end-2019. In turn, credit migration is also likely to have an impact on their capital ratios.
In the second quarter, all three banks recorded a sharp dive in earnings. DBS's Q2 net profit fell 22 per cent to S$1.2 billion; OCBC's slumped 40 per cent to S$730 million; while UOB's tumbled 40 per cent to S$703 million.
Net interest margin (NIM) compression started in late 2019, with a big drop in Q2 2020 as the Singapore Interbank Offered Rate (Sibor) fell significantly. "We expect continued margin compression due to the lag effect of Sibor reduction, which will pressure revenues for 2020. We believe margins are likely to be flat in 2021."
In the second quarter, NIM stood at 1.62 per cent for DBS, 1.6 per cent for OCBC and 1.48 per cent for UOB.
Fitch has projected for non-performing loan (NPL) ratios to peak at a little over 3 per cent in FY2021 for the trio. As they continue to build buffers in the second quarter, all three have kept to their earlier guidance from the first quarter. Q2 NPL ratios remained steady at 1.6 per cent for OCBC and UOB, and at 1.5 per cent for DBS.
It cautioned that the full extent of the pandemic's impact may only be reflected in FY2021 NPL ratios, as debt repayment moratoria around the region will delay much impaired-loans recognition. But the banks are expected to continue to book significant general provisions in FY2020.
As for credit costs, the banks' guidance range from 100 to 130 bps cumulatively through to FY2021. "We expect all three major Singapore banks to continue to generate profits throughout the downturn, with the trough being in 2020," said Fitch.
