Strong prudential policy in Singapore related to real estate and a stable funding base offset fragilities in the city-state's banking sector on the back of rising household leverage, say analysts, after the unexpected move by Moody's to revise its sector outlook from stable to negative. The ratings agency cautions that banks’ credit profiles in Singapore could deteriorate due to rapid loan growth, onshore and offshore leverage exposures, and fears over the stability of the real-estate sector.
While strong economic growth and liquidity have boosted Singapore’s stable and benign banking sector since 2009, pressure from developed markets, including the scaling back of quantitative easing in the US, could trigger a reverse in the credit cycle, leading to a worsening of NPL ratios and higher credit costs, says Moody’s.
“With the potential risk of a turn in the interest rate cycle, we view strong asset inflation and credit growth trends as vulnerabilities, as this combination would likely cause credit costs to rise from their current low base,” says the report published on Monday. “If interest rates rise, we therefore expect rising credit costs to outweigh any potential increases in lending margins.
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| Source: Reuters |
“Our outlook is a directional, forward-looking view of the trend in the banks’ relative credit quality, which we consider as having potentially reached – or to be close to reaching – a cyclical peak.” Nevertheless, analysts argue that the revised outlook might be unfounded as the banking and real-estate sectors will remain resilient.
For example, stamp duty on a second home in Singapore is 10% compared to 7% for a first home and individuals cannot borrow more than 50% against the value of their home for a second mortgage.
“To a certain extent, the government is mitigating risk at the source,” says Jaj Singh, banks analyst at Standard Chartered based in Singapore.
“Most mortgages are for home ownership rather speculative in Singapore as well, so there is an incentive for people to pay their loans back rather than default. Indeed, unlike what we saw in the US, the law in Singapore favours the banks so people won’t just be able to walk away from their homes. In addition, certain things like the debt-to-servicing ratio in the city-state is low.”
And although debt levels of city-states such as Singapore are high, much of the population has liquid savings, a fact often overlooked by those assessing the situation, highlights Singh. The Central Providence Fund, for example, is a compulsory savings vehicle for workers and permanent residents in Singapore, providing access to extra cash if needed.
High levels of employment in the country will also help offset damaging consequences. “For interest rates to cause any damage, they would need to rise pretty significantly and unemployment would need to spike as well,” says Singh. "But as we saw after the Asian financial crisis, the default rate on mortgages remained low because unemployment was hardly affected.
“Indeed, there is actually a shortage of labour in Singapore, so unemployment is not a problem. People will be able to service their loans.”
Indeed, the individual ratings for banks in Singapore remain unchanged. DBS, United Overseas Bank and Oversea-Chinese Banking Corporation are all rated Aa1 by Moody’s.
As David Marshall, a Singapore-based analyst at CreditSights, says: “If the growth is limited to consumer credit, there would be concerns, but Singapore is an international financial centre. Banks here have various international as well as domestic exposures mitigating some of the risk.”
Outside Singapore, bank assets grew at a 15% compound annual growth rate between 2009 and 2012, relative to 11% for Singapore assets during the same period, and assets outside Singapore represented 37% of total Singapore bank assets in 2012.
According to the report, a substantial number of these assets are in markets where Singapore banks have considerable operating histories, such as Malaysia.
While offshore exposure boosts the diversity of banks' earnings in the city-state, it leaves them open to the risk of a turn in the regional macro-economic cycle as fears grow over the evaporation of Asian savings.
Gene Fang, a Moody's vice-president and senior analyst, says: “Take for instance DBS, which has a large presence in Hong Kong. [The] banking sector [there] also has a negative outlook and is also under pressure."
What's more, Singaporean banks have a presence in Malaysia.
“Although the banking sector has a stable outlook, household debt is high, so there are potential problems there too,” says Fang.
In any case, the rare bearish note from Moody's with respect to Singapore could also highlight how rating agencies are seeking to establish more forward-looking assessments of issuers' creditworthiness.