Weak global growth and uncertainty over interest rates are among rising “headwinds” that threaten to drag on Singaporean banking profits, according to the city-state’s central bank.
The potential for spillover from vulnerabilities in China’s financial system into Asia and anti-globalization sentiment are also among challenges highlighted in the Monetary Authority of Singapore’s (MAS) annual assessment of the financial sector published yesterday.
The study flagged the possibility of weaker growth weighing on households’ ability to service debt.
“MAS’ stress tests show that Singapore’s financial institutions, corporates and households are able to weather the present challenging environment,” MAS Deputy Managing Director Ong Chong Tee (王宗智) said in a statement.
“Most corporates remain resilient, although some strains may be seen in specific industries. We should all stay vigilant to guard against the risks highlighted in the report, given the global macroeconomic uncertainties,” Ong added.
Profits at Singapore’s three publicly traded banks have come under pressure from a weakening domestic economy and from increased charges for loan losses tied to the oil and gas industry, which has been hurt by lower energy prices.
A slump in the Singapore interbank offered rate — one of the benchmarks for local interest rates — has also curbed the amount lenders charge for loans.
Largest lender DBS Group Holdings Ltd reported third-quarter net income that was little changed from a year earlier, while United Overseas Bank Ltd’s (大華銀行) profit sank 7.8 percent.
Oversea-Chinese Banking Corp Ltd (華僑銀行) reported a more than 4 percent increase, although its provisions for soured assets jumped 10 percent.
“Low global interest rates will continue to squeeze financial institutions’ interest and investment income and perpetuate financial distortions,” the central bank said in its report. “On the other hand, the prospect of faster-than-expected interest rate normalization in the US could drive capital flow and currency volatility.”
There is a possibility that the lower ability of some companies to service debt could weigh on asset quality, it said
The banking system’s overall nonperforming loan ratio had risen to 2.1 percent at the end of September, compared with 1.5 percent a year earlier, driven by souring credit in the manufacturing, transport, storage and communications industries, the report showed.
Still, the central bank’s stress tests showed that the banking system can withstand “severe shocks,” as capital levels were “well above” required regulatory thresholds.
It called on banks to “maintain sound credit underwriting standards and set aside adequate provisions” to withstand more bad debt in the event of a protracted economic slowdown.
Credit growth slowed since the start of the year, particularly in nonresident loans, the central bank’s report said, adding that resident loan growth has moderated in line with the economy, although it “remains resilient.”
Banks have said they expect the current economic outlook and global uncertainties to weigh on demand for corporate credit.
Banks’ net interest incomes have fallen due to narrower net interest margins, although this has been partially offset by rising noninterest income, it added.
Banks’ overall provisioning coverage for nonperforming loans “remains strong” at 240 percent, the central bank said, adding that it “remains vigilant” on property prices, and will, if necessary, take “appropriate measures to maintain a stable and sustainable” property market.
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