Singapore’s MAS sees rising global headwinds for bank profits

Bloomberg

Weak global growth and uncertainty over interest rates are among rising ‘headwinds’ that threaten to drag on Singaporean banking profits, according to the city’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 annual assessment of the financial sector published on Tuesday. 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,” the central bank’s Deputy Managing Director Ong Chong Tee 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.”
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.
Margin Squeeze
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 profit sank 7.8 percent. Oversea-Chinese Banking Corp. reported a more than 4 percent increase, though 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 U.S. could drive capital-flow and currency volatility.”
The MAS warned of the possibility that the lower ability of some companies to service debt may weigh on asset quality. The banking system’s overall nonperforming-loan ratio had risen to 2.1 percent at the end of September from 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. The MAS 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. The credit growth of MAS slowed since the start of the year, particularly in non-resident loans, while resident loan growth has moderated in line with the economy, though remains resilient.
According to the reports, MAS, if necessary, will take ‘appropriate measures to maintain a stable and sustainable’ property market.