Weaker corporate balance sheets and currency market volatility pose risks to Singapore lenders, though the local banking system remains resilient, the Monetary Authority of Singapore (MAS) said yesterday.
Non-performing loans have increased and moves in emerging Asian currencies “could exacerbate foreign currency mismatch risks for banks in Singapore,” the Singapore central bank said in its annual financial stability report.
“The turning credit cycle poses risks to Singapore’s banking system. Asset quality remains healthy, but there are signs of increased credit risks alongside weaknesses in corporate balance sheets,” the MAS said.
The non-performing loan ratio among Singapore banks rose to 1.5 percent in the third quarter of this year, from 1.1 percent a year earlier, the central bank said.
Bad loans have risen in the manufacturing sector and banks with exposure to trade might see higher credit risks, the monetary authority said.
“It is important for our financial sector to continue to be vigilant to new or growing risks as highlighted in the report, as external headwinds and contagion risks have intensified,” MAS deputy managing director Ong Chong Tee (王宗智) said.
However, the report also demonstrates that Singapore’s banks, companies and households are “resilient to potential vulnerabilities and shocks,” he added.
The MAS said its annual stress test of Singapore banks showed they would be able “to withstand severe shocks.”
The test included a scenario in which the US Federal Reserve raised interest rates more aggressively than expected and China’s economy experiences a prolonged slowdown.
Singapore banks were also asked to test for a situation where their largest counterparty in the interbank market failed. Chinese banks are the top interbank counterparties for many banks in Singapore, the monetary authority noted.
Loan growth would remain weak “in the near future” amid a slowdown in China, regional currency weakness and the sharp drop in commodity prices, according to the MAS.
The recent decline in the Singapore property market suggests a benign scenario, with property prices settling at sustainable levels over time, the MAS said.
However, the central bank is to remain vigilant for signs of renewed “froth” in the residential property market on the back of still-elevated prices in certain market segments, it added.
Meanwhile, profitability of companies in Singapore has declined while their borrowing has risen since the 2008 global financial crisis, the MAS said.
The median return on assets of companies listed on the local exchange fell to 3.5 percent in the second quarter of this year, from 3.9 percent in the corresponding period last year.
“Highly leveraged firms in certain sectors could be vulnerable if interest rates were to rise or if the earnings outlook were to weaken,” the MAS said.
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