Global ratings agency, Fitch Ratings, sees a more challenging operating environment for Singapore banks going forward.
According to its latest report, Fitch expects the three local banks – DBS, OCBC and UOB – to see a slowdown in investment banking and capital market-related income over the next two years.
Loans growth is seen to be moderating, while loan-loss provisions are rising. However, Fitch said it is confident Singapore's Big Three will be resilient enough to ride out the challenges. Ambreesh Srivastava, Senior Director, Financial Institutions, Fitch Ratings, said: "Singapore banks have taken fairly prudent levels of mark-to-market write-downs, close to 90 percent on account of CDOs (collateralised debt obligations) on subprime-related exposure.
"That is the main reason why all banks reported higher provisioning charges in 2007, compared to 2006 and previous years – more than 100 percent for DBS and OCBC; 66 percent for UOB.
"We do expect Singapore banks' loan-loss provisions to rise modestly from exceptionally low levels. Coming back to banks' structured investments, net exposure is quite modest, ranging from 1 percent for UOB to 5 percent for DBS."
And while fee income will continue to show good momentum, Fitch said non-interest income growth at the Big Three will be weighed down by decreasing capital market-related income.
A slowing property market also means interest income will likely moderate in the form of smaller loans growth, despite being buoyed by increasing borrowing activity in the construction sector.
Overall, Fitch remains positive about the outlook for Singapore banks due to their regional forays.
Mr Srivastava said: "We believe these banks have strong domestic franchises, the strongest bank credits in Asia, healthy financial conditions and improved management capabilities. All this is reflected in high-credit ratings.
"After several years of benign credit conditions in Singapore, the operating environment going forward will be more challenging. This is reflected in slower economic growth and moderation in asset prices.
"Banks' regional forays increase risk profile somewhat, but the disciplined manner (in which) they pursue this strategy, together with strong loss absorption indicators, makes banks reasonably resilient to challenging times ahead. Generally speaking, we are quite appreciative of this strategy."
This confidence is boosted by what Fitch calls "strong solvency positions" by the banks.
"The net non-performing loans – defined as gross NPL minus specific reserves – as a percent of equity is negative for all banks, underscoring strong solvency positions. Write-downs on such investments may dent earnings somewhat but not solvency issue for banks," said Mr Srivastava.
However, there remains a small chance that all this optimism could be derailed.
Mr Srivastava said: "In the unlikely event of a deep and prolonged recession in the US, which may impair consumer confidence globally, the property sector in Singapore and in the rest of Asia will be affected significantly...
"Given the banks' high-credit ratings, upward pressure is limited. Downward pressure may arise from event risk – large acquisition in less creditworthy institution or country."
Fitch has an AA- rating on all three local banks.- CNA/so
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