Are Singapore banks feeling the squeeze of Euro crisis?

Maybe it's not the falling deposits and loans we should be looking at, rather at deteriorating banks' asset quality.

The facts:

System loan growth slowed to 1.4% in 4Q12 from a year ago at 6.1%. Sequentially, loans shrank 0.3%, largely led by a 1.4% mom dip in ACU loans. Credit demand in Singapore, too, showed signs of exhaustion, with DBU loans growing 3.5% in 4Q12 against the previous year's 8.8% and 0.6% mom.

Property-related loans once again led the growth at +1% mom increment, forming 75% of Apr’s lending but 4Q12 business loans slowed to 3.1% compared to +14.8% in 2011. Loan repayments in commerce dropping by 1.1% mom and other business loans by 1.7%, meanwhile, offset transport-related loan growth of 6.2% mom. 

So what do analysts have to say about the downtrend?

Kenneth Ng, analyst at CIMB

The moderation in loan demand is in fact in sync with our 12-15% growth expectation for 2012. The decline in ACU loans should have stemmed from fewer trade-financing opportunities in the region. Our biggest concern remains asset quality. Asset quality continued to deteriorate with Apr credit-card charge-off rates inching closer to their 10-year average of 5%.

Credit-card charge-off rates continued to climb in Apr, to 4.53% from 4.46% in March.

Alfred Chan, analyst, Fitch Ratings 

"Singapore banks’ asset quality is at its strongest years, supported by positive (albeit slower) economic growth and low unemployment and interest rates. Fitch’s GDP growth forecast for 2012 is 2.5%.

Nonetheless, Singapore is a small open economy, and would be vulnerable to falling global trade. This scenario remains a possibility due to the mounting uncertainties globally, including the sovereign crisis in Europe and a slower Chinese economy, although the export and manufacturing statistics have held up fairly well to date. Given the trade linkages, the manufacturing, general commerce and shipping industries (which account for about 30% of the banks’ loans) tend to show an earlier and faster deterioration in asset quality than other economic sectors.

Larger exposure is to the broad real estate segment (at close to 40% of loans), of which two-thirds are mortgages and the rest to property developers and investors. Many developers and investors have healthy leverage, with sharp delinquencies likely to surface only in a prolonged property sector trough. Fitch expects a low asset-quality threat from mortgages, with job losses likely to rise modestly and interest rates staying low. This backdrop also supports other types of consumer loan quality. This includes credit cards, which are unlikely to be a major threat to the industry as this portfolio accounts for less than 2% of system-wide loans, with the charge off rate steadying at 4%-5% over the past two years.

Overall, Singapore banks have shown a good record in coping with an inherently volatile economy and property market, thanks to loan portfolio diversity and satisfactory risk management. The government’s countercyclical measures have also helped minimise asset quality shocks to the banking system. This was the case during the 2008-2009 global downturn where those measures had been largely effective in helping vulnerable segments tide through the difficult period. "

Justin Harper, trader, IG markets

Singapore’s banks recently posted healthy quarter one earnings cementing their position as some of the world’s strongest and safest banks. While the banking sector in Europe is showing worrying cracks under the strain of the eurozone crisis, Singaporean banks are worlds apart.

They are well capitalised, have strong balance sheets and are constantly looking for expansion opportunities within Southeast Asia. DBS is the latest bank looking to expand its footprint with its pursuit of Indonesian bank Danamon.

However there are a few dark clouds on the horizon. Asian banks are feeling the squeeze from the eurozone crisis which has damaged the global economic recovery. And revenues in Singapore are being tested with smaller loan business. Charge-off rates are also falling back to their long-term averages which means another income stream is shrinking.

But on the plus side, European banks are reducing their exposure to Asia and pulling out lending facilities in the region. This has left a gap which Singapore’s banks are poised to fill, helping to cancel out some of the downside risks.

On the whole, I think Singapore’s banks are in a healthy state and should be resilient enough to weather the economic storms from Europe and our domestic market.