Singapore banks remain healthy despite bad loans: Fitch

September's buffer provision for bad loans fell to 102.7%.

Fitch Ratings believes the credit profiles of Singapore's three local banks will remain strong, characterised by healthy funding and liquidity profiles and strong capitalisation, despite 3Q16 results that showed continued - though modest - decline in asset quality due to their exposure to the troubled oil & gas sector.

"We believe these three banks - DBS Group Holdings, United Overseas Bank Limited and Oversea-Chinese Banking Corp, have strong loss-absorption buffers to weather global macroeconomic headwinds, given their strong capital buffers, sound lending practices and adequate profitability," said Fitch.

These factors support Singapore banks' 'AA-' ratings.

Here's more from Fitch:

As we had expected, stresses from the oil & gas sector continued to exert pressure on banks' asset quality. The weighted average NPL ratio for the three banks had increased to 1.37% at end-September 2016, from 1.23% at end-June 2016 and 1.06% at end-2015.

Still, the underlying asset quality for the non-oil and gas sector remained broadly resilient. The weighted average provision buffers (as a proportion of NPLs) remained sound, at 102.7% at end-September 2016, despite having fallen from 113.3% at end-June 2016.

The combined oil & gas exposure of the three banks was SGD47.3bn (USD34.7bn) at end-September 2016, or 50% of their combined core equity Tier 1 (CET1) capital. This may seem high, though the risk is mitigated by the majority of the oil & gas exposure being collateralised. Furthermore, only SGD16.1bn of this exposure is to the more vulnerable subsector of offshore support services, which accounted for 17% of banks' CET1 capital.

Strong domestic deposit franchises remain one of the Singapore banks' strengths. This is reflected in their sound Singapore dollar liquidity coverage ratios (LCR), which had remained in excess of 200% for the last two quarters. The Singapore dollar loan-deposit ratios improved to 86.0% at end-September (June: 88.7%, March: 87.2%) as banks shored up liquidity ahead of the US money market reforms that took effect from 14 October. The banks' all-currency LCR averaged a comfortable 132% for 3Q16.

The banks' core capitalisation ratios continued to strengthen modestly in the third quarter, aided by discounted scrip dividend schemes for DBS and UOB, slower risk-weighted asset growth and healthy internal capital generation. Fully-loaded CET1 ratios range from 12.4% to 13.5%, and we expect capitalisation to remain stable in light of more modest growth expectations in the near term. This despite modestly higher risk weight charges that will affect the banks from 1 January 2017 due to further updates to bank capital calculations under Basel guidelines. Our internal stress tests show that Singapore banks' sound capital buffers should enable them to weather a significant deterioration in credit quality.