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Singapore banks' weakening operating environment pressures ratings: Fitch Ratings

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The potential outcomes of the review are a downgrade of the three lenders' issuer default ratings to A+ and their viability ratings to a+, or an affirmation at AA- and aa- with either a negative or stable outlook.

FITCH Ratings aims to review and resolve a rating watch negative (RWN) placed on DBS, OCBC and United Overseas Bank "in the next three months or so", the credit ratings agency said in a report on Tuesday.

Fitch Ratings in April placed the three Singapore banks on RWN due to the impact of the coronavirus pandemic, and "limited headroom" in their AA- viability rating-driven ratings.

The potential outcomes of the review are a downgrade of the three lenders' issuer default ratings to A+ and their viability ratings to a+, or an affirmation at AA- and aa- with either a negative or stable outlook, analysts Tania Gold, Priscilla Tjitra and Willie Tanoto wrote.

They said a ratings downgrade could be triggered by a lower operating environment (OE) score and/or a weaker financial profile.

The OE acts as a constraint on the viability ratings of banks. The three banks' OE score of aa- is at the same level as their viability ratings-driven issuer default ratings of AA-, the analysts added.

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The OE score could be lowered if there is a "worse-than-expected slowdown or slower-than-expected recovery" in the key markets the three lenders operate in, they said.

Fitch Ratings uses a blended OE score for the banks to take into account the fact that less than half of their loans are in Singapore. 

"The aa-/negative OE score is weighed down by the banks' operations in overseas markets where we assess the operating environment to be of higher risk," the analysts said.

"These markets are significant contributors to the banks' growth prospects, and while they have been stable in recent years, they are currently also under stress."

The OE scores of the major Asean markets that the lenders have a presence in - such as Malaysia, Thailand, and Indonesia - were downgraded by Fitch Ratings this year.

The analysts said the downgrades were mainly driven by the downward revision in Fitch Ratings' gross domestic product forecasts for these markets amid the pandemic.

Singapore's standalone OE score was also put on a negative outlook "to reflect the impact of the pandemic", they added.

In addition to the OE, Fitch Ratings in April placed the three banks' asset quality, earnings and profitability, as well as capitalisation and leverage scores on negative outlooks due to the pandemic.

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