S'pore banking system resilient, banks have strong deposit base, are transparent about exposures
The news out of the banking sector has not been good
of late - wage cuts, retrenchments, shuttering of certain businesses,
falling share prices.
One shocker of a recent headline even had a Swiss
fund manager predict that a massive banking crisis would hit Singapore's
shores.
The gloomy news flow comes amid a backdrop of
plunging oil prices, a slowing Chinese economy and turbulent financial
markets. These have triggered restructuring exercises involving
thousands of worldwide job cuts and billions of dollars of
capital-raising at global banks.
Indeed it is fair for anyone to wonder whether Singapore's banking sector is in real trouble.
THE RISKS AHEAD
In its latest Financial Stability Review released in
November last year, the Monetary Authority of Singapore (MAS) warned
that pockets of risks are emerging amid slowing growth and rising
interest rates.
"The credit cycle has begun to turn, with external
and domestic loan growth moderating alongside slowing economic growth,"
the MAS said. "This poses risks to Singapore's banking system. Asset
quality remains healthy, but there are signs of increased credit risks,
for example, a slight uptick in non-performing and special mention
loans."
Furthermore, the MAS added, corporate earnings in
Singapore have weakened over the past year amid an uncertain operating
environment. While corporate balance sheets remain healthy overall,
highly leveraged firms in certain sectors could be vulnerable if
interest rates rise or earnings weaken further. Firms with foreign
currency exposures could also face increased foreign currency mismatch
risks should currency market volatility persist.
The latest fourth-quarter financial results of the
three local banks - DBS Group, United Overseas Bank and OCBC Bank - show
that the sharp fall in oil prices has already had an impact. OCBC, for
example, said its non-performing loans (NPLs) rose 54 per cent to $1.97
billion last year, with all net new NPLs coming from oil and gas
customers. Chief executive Samuel Tsien added at a results briefing last
week that about 47 per cent of the bank's $12.4 billion oil and gas
portfolio is under stress.
UOB's non-performing loans rose 22 per cent to $2.9
billion as of December, with the transport, storage and communications
sector recording the highest amount of non-performing loans at $977
million. Oil and gas loans are classified under this category,
The banks acknowledged that if oil prices stay low
for much longer, their loan books will feel even more pain. DBS chief
executive Piyush Gupta, for example, said that if oil prices stayed at
US$20 for the next two years, its oil and gas loans will com
Since the 2008 financial crisis, Singapore's three
lenders have ramped up their regional presence, making them that much
more exposed to external headwinds. Major downturns in markets where
they are active, such as Indonesia and Malaysia, whose economies have
been affected by slumping commodity prices and slowing trade with China,
will put more pressure on their loan books. The slowing of the Chinese
economy could also affect the banks' loans to clients there.
So far, there has not been much damage yet. At DBS
and OCBC, China NPL ratios are lower than their overall ratios, and all
three say that bad debts in Greater China will likely be manageable as
most of their exposure in the market is to state-owned enterprises and
top-tier banks.
That might come as cold comfort to those who read the
dire warning from Swiss hedge fund manager Felix Zulauf that the
Chinese economy will suffer a hard landing, triggering a banking crisis
here. Singapore's banking sector has attracted a high volume of foreign
capital over the years, but this capital will rush out if the Chinese
economy slows sharply, he said.
But while bankers and analysts here acknowledge there
are risks, they are sceptical things could get that bad. Speaking at
DBS' results briefing on Monday, Mr Gupta said the banking sector is not
facing a crisis like the kind that ensued after investment banking
giant Lehman Brothers collapsed in 2008.
"Not withstanding what you might hear from hedge fund
managers from Switzerland, Singapore is not a basket case." After all,
he noted, Singapore is one of few economies in the world with the top
sovereign credit rating from all three ratings agencies, it continues to
hold massive amounts of foreign currency reserves and it has maintained
a current account surplus for the past decade.
This current account surplus means that Singapore has
long been a capital exporter anyway, noted Bank of America Merrill
Lynch economist Chua Hak Bin, so capital outflows are nothing new.
"Capital is flowing out to be invested overseas, by Temasek Holdings,
GIC and also individuals. There's always capital outflow, which is a
function of Singapore's high savings."
Deloitte South-east Asia financial services industry
leader, Mr Ho Kok Yong, noted that banks here maintain capital ratios
well above the levels required by the Basel III global capital
standards. "This, coupled with our robust regulatory framework and
strong macro-prudential measures, definitely helps to minimise risks
arising from the headwinds to come," he added.
BIG THREE IN GOOD SHAPE
Although the local banks warned that worsening
economic conditions will likely cause further deterioration in asset
quality, they also showcased strong balance sheets, cushioned by thick
capital bases.
What is also reassuring is that they have been open
and transparent about how vulnerable their portfolios are. All three,
for example, revealed their loan exposures to the oil and gas industry.
Analysts remain relatively upbeat about the outlook
for the banks. Moody's Investors Service analyst Eugene Tarzimanov said:
"Some balance sheet metrics , like asset quality and profitability,
will see some deterioration this year, but those are just two pillars of
banking. We expect stability in the other pillars - capital, funding
and liquidity. So even if you have NPLs going up and profitability going
down, you have to take into context the broader strength that
Singapore's banks have."
That stability in funding and liquidity comes from
the strong deposit bases that the three local lenders enjoy
domestically, Mr Tarzimanov added.
Another factor working in favour of Singapore's three
local lenders is the fact that they have fewer legacy issues to
resolve, unlike many big global players.
Many of these international banks expanded rapidly
into emerging markets such as Asia and the Middle East over the past
decade, only to find that they have over-extended themselves, and now
have to make major cutbacks as business conditions have dramatically
worsened. Standard Chartered said in November it would axe 15,000 jobs
and raise US$5.1 billion (S$7 billion) after posting a shock quarterly
loss.
Barclays last month shut its securities operations
across Asia. Deutsche Bank unveiled in October a plan to exit from 10
countries and cut 9,000 jobs as part of a sweeping overhaul.
The list goes on.
Inevitably, these strategic clean-ups have affected the Singapore operations of such banks and will likely continue to do so.
Foreign banks operating here depend more on funding
from financial markets and from their parents in Europe or the United
States than on local deposits. If markets are volatile, as they have
been for several months now, or if their headquarters are tightening
their belts, that could mean tighter liquidity and funding conditions
for the Singapore operations of foreign banks.
As gloomy as that all sounds, the situation is not catastrophic for Singapore.
"We should not overstretch the extent of the problem.
Foreign banks such as HSBC, Citi and Standard Chartered, are part of
global banking groups. Even if they are scaling down, they still see
Singapore as a core market and we don't think they would retract
materially from Singapore," said Mr Tarzimanov of Moody's.
The MAS' own assessment is that "Singapore's banking
system remains resilient amid an uncertain external environment". Banks
have strong capital and liquidity buffers to withstand severe shocks but
"continued vigilance is warranted", it said in its Financial Stability
Review.
Most households and companies will still be able to
service their debt payments even as interest rates climb or corporate
earnings decline, it added.
No doubt, there is little to cheer about in the
global economy and the end of the tunnel is still miles away. For banks -
and their corporate clients across most industries - things will get
worse from here.
If it's any consolation, the deterioration will not
happen all at once, and the local banks are facing the headwinds to come
from a position of relative strength.
It is not time to panic just yet, but it is a good time to start paying closer attention to banks' financial results.
Ref:http://www.straitstimes.com/opinion/news-of-banking-crisis-greatly-exaggerated
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