Outlook for Singapore banks stable: Fitch

It said DBS, OCBC, and UOB should be able to keep their credit profiles intact, even with the probability of a fresh global downturn.

“The agency's expectation stems from the banks' strong and liquid balance sheets, reasonably diversified loan books and satisfactory risk management, and the government's fiscal capacity to introduce countercyclical measures to protect the domestic economy - as evident during the 2008-2009 global turmoil,” said Fitch.

According to Fitch, downside rating risks could result if the renewed downturn were to be sharp and protracted, resulting in significant capital impairment risks. Fitch, however, views this likelihood as low in view of the banks' solid loss-absorption defences and satisfactory records.

Fitch noted, “The Singapore economy is among those at risks of a renewed recession due to its small size and high degree of openness. While the direct impact from the ongoing sovereign crisis in Europe is unlikely to have a significant impact on Singapore banks' balance sheets, their asset quality and profitability is likely to deteriorate against a weakening global economic backdrop.” The risk of capital impairment at present, though, is believed to be low.

The banks are expected to maintain strong core capitalisation, which will help to preserve their financial profiles in a difficult operating environment. “Their core Tier 1 capital adequacy ratio (without hybrids) remains high, at an average 11% at end-September 2011. The banks' strong deposit base in Singapore continues to support their loan portfolios, including in US dollars,” said Fitch.

Loans/deposit ratio has increased to an average 88% at end-September 2011, but Fitch does not view this as excessive. It warned, however, that the tight US dollar liquidity needs to be closely monitored for funding risks, as the loan/deposit ratio for all three banks' US dollar books exceeds 100%.

Fitch Ratings' Report can be viewed here.