OREANDA-NEWS. Singapore banks' credit profiles are likely to remain resilient despite macroeconomic headwinds in 2016, says Fitch Ratings. Recently reported 2015 full-year results were on the whole solid, but macro headwinds were already contributing to slower loan growth and higher credit costs.

Cyclical risks in Singapore and other key regional markets are rising amid a slowing economy and continued volatility in commodity prices. Fitch expects the domestic property market to correct further as a large supply of new homes comes on to the market at a time when the economic outlook has become less sanguine. These factors are likely to weigh on banks' asset quality and profitability. Fitch expects credit costs for the three local banks - DBS (AA-/Stable), UOB (AA-/Stable) and OCBC (AA-/Stable) - to continue rising from still-low levels.

Overall loan exposure outside of Singapore remained relatively stable at around 52% of total loans at end-2015. Greater China, Malaysia, Indonesia and Thailand are the largest offshore exposures for the banks. Many of these markets are among the most exposed to slowing Chinese demand and the related commodity price rout, and we expect further deterioration in Singapore banks' asset quality if the China slowdown were to lengthen or deepen. Singapore banks' exposure to Greater China has increased to 25% of total loans as at end-2015 from 17% as at end-2008.

One of the key risks to asset quality, flagged by the banks, is from the oil and gas sector. Smaller players with less resources and bargaining power are most at risk, especially those in the exploration and production sub-sector. Stress has already emerged in oil support services. OCBC highlighted that 14% of its SGD5.8bn support services portfolio was impaired by end-2015. We expect the credit stress to broaden and deepen if low oil prices are prolonged. However, we expect the impact on earnings to be manageable as such exposure is moderate as a proportion of banks' overall portfolios, and is often secured with moderate loan-to-value ratios, which limit the loss even with falling collateral values.

We expect residential mortgage asset quality to stay resilient in the absence of any significant increase in the unemployment rate. Household balance sheets remain broadly healthy, and macro-prudential measures in recent years have focused on ensuring that households borrow within their means.

Fitch believes the deterioration in asset quality will remain manageable given the banks' reasonably conservative lending policies. The average NPL ratio for the three Singapore banks remained low at 1.1% as at end-2015 compared with 0.9% at end-2014. The uptrend is likely to continue over 2016..

A large part of the banks' rapid loan growth since the global financial crisis has been driven by traditionally safer residential mortgages in Singapore and short-term trade loans, where the counterparties are mainly the top five Chinese commercial banks and policy banks. In terms of corporate lending in mainland China, Singapore banks have mostly targeted the state-owned enterprises and large corporates with stronger balance sheets.

Fitch believes the three local banks are prepared for current macroeconomic headwinds given their high capitalisation ratios, adequate profitability (average core ROE of 11.4% for 2015), reasonable loan-loss reserves (133% as at end-2015), disciplined funding practices and broadly liquid balance sheets. The Singapore dollar liquidity coverage ratio (LCR) for the three Singapore banks stood in excess of 200% at end-2015, with all-currency LCR averaging 129%. Their Singapore dollar loan-deposit ratio was also comfortable, ranging from 84% to 92% at end-2015.

Fitch's internal stress tests show that Singapore banks' sound capitalisation buffers should enable them to weather a significant deterioration in credit quality. Fully-loaded Common Equity Tier 1 (CET1) ratios ranged from 11.7% to 12.4%. We expect Singapore banks' capital positions to remain strong in the medium term, supported by adequate internal capital generation and slower asset growth.